February 14, 2009
U.S. mall owners General Growth Properties Inc., Kite Realty Group Trust and Macerich Co., faced with rising vacancy rates in the recession, are being forced to accept lower rents from their remaining tenants.
Real estate investment trusts that own retail properties are getting snagged by co-tenancy clauses that allow merchants to pay less when anchors such as department stores shut down, according to Real Point LLC data based on loan-servicer reports.
“A year ago, tenants in major shopping centers were rarely invoking co-tenancy clauses,” said Charles Daroff, a partner at Hurtuk & Daroff Co., a Cleveland-based law firm that specializes in real estate. “Today, with the disappearance of major tenants and increasing vacancies, these clauses are being triggered.”
Linens ‘n Things Inc., Circuit City Stores Inc. and Steve & Barry’s LLC are among retailers that filed for bankruptcy protection in the past year as consumers cut back. Sales at U.S. stores fell 2.7 percent in December, the sixth monthly drop in a row. That’s the longest period of declines since comparable records began in 1992, according to the Commerce Department.
The decline in rental income could hurt mall owners’ ability to make debt payments at a time when some are on the brink of insolvency, said Andy Day, a commercial mortgage-backed securities analyst at Morgan Stanley. Lenders may demand more onerous terms when refinancing debt, he said.
Late Payments
A growing number of shopping-center owners are falling behind on loan payments. The 60-day delinquency rate on retail property mortgages that were bundled and sold as bonds is currently 0.96 percent, compared with 0.32 percent in September, Morgan Stanley data show. Shopping centers and malls account for 27 percent of the $824 billion in commercial mortgage-backed debt outstanding, according to Morgan Stanley.
Mall REIT shareholders may see more declines this year. The Bloomberg REIT Regional Mall Index, whose seven companies include General Growth, has plunged 66 percent in the past year. That’s more than the 49 percent drop in the Bloomberg REIT Index. The Bloomberg REIT Shopping Center Index, comprised of 20 companies including Kite, has fallen 48 percent.
Reduced Rent
Co-tenancy clauses are built into leases to ensure tenants get the foot traffic they pay for. If an anchor store leaves, smaller tenants often have the right to pay less rent until the space is filled. If it isn’t filled, other retailers at the shopping center may be allowed to break their leases and leave.
During the development phase, future tenants often have rents tied to occupancy rates or the securing of key anchors, and don’t have to pay full rent until those conditions are met.
Linens ‘n Things was one of the largest tenants at the Plaza at Cedar Hill, a 299,847 square-foot (27,857 square-meter) shopping center outside of Dallas owned by Kite Realty. The retailer closed its store there in May. In August, Gap Inc.’s Old Navy stopped paying base rent and instead paid 2 percent of sales, according to the loan documents.
TJX Cos.’ department store Marshalls will begin paying 2 percent of sales in place of base rent if the space is still empty at the end of February.
“No one want to invoke a co-tenancy clause, but, especially in this economic environment, we want to be in vibrant malls where traffic is high,” said David Zoba, senior vice president of real estate for Gap, the largest U.S. clothing retailer.
Excerpt From: http://www.bloomberg.com