Saturday, February 28, 2009

Retail, Co-Tenancy Clauses, and Ecological Cascade Effects

National Real Estate Investor has a story detailing the effect co-tenancy clauses are having on retail centers. An excerpt:

As retail chains close unprofitable stores across the country, remaining tenants at the shopping centers are increasingly invoking clauses in their leases that give them the right to pull out of a center without penalty, placing new financial strain on the property owner. At times the added burden of losing additional income is so great that it pushes the owner toward bankruptcy.

Called co-tenancy clauses, the legal passages in tenants’ contracts often say that if a major anchor such as Macy’s or Best Buy leaves the center, then they have the right to a remedy — from rent reduction to withdrawing from the center in order to seek a more profitable location. That is posing a widespread problem for shopping center owners, says real estate attorney Irwin Fayne, a partner at Holland & Knight in Fort Lauderdale, Fla.

This is a real estate variation of an ecological cascade effect:

An ecological cascade effect is a series of secondary extinctions that is triggered by the primary extinction of a key species in an ecosystem. Secondary extinctions are likely to occur when the threatened species are: dependent on a few specific food sources, mutualistic(dependent on the key species in some way), or forced to coexist with an invasive species that is introduced to the ecosystem.

Small retail tenants, of course, are dependent/mutualistic with draw retailers – they hope to capitalize on customer traffic created by the draw tenant. There is also a retail variation on being forced to coexist with an invasive species. From Surplus Real


Just think how happy a clothing retailer is when the K-Mart store turns into a lumber yard.