COVER STORY, MAY 2005

LEASING CONCERNS WHEN MIXING USES
Issues to consider when leasing space in a mixed-use project.
Abe Schear

Schear

Mixed-use properties, which combine some mix of retail, residential and office space, are dynamic environments, but they present unique issues for retail tenants.

Oftentimes landlords exaggerate these issues by using a standard “strip center” lease for the project. Although the two property types share certain attributes, in a number of major areas the strip-center lease is simply a bad fit, putting a greater burden on tenants to identify missing details.

The following is a guide to understanding the unique aspects of mixed-use leases:

Construction and Utility Issues

The multi-storied, mixed-use property oftentimes poses significant construction issues for the retailer, including questions about construction equipment, access, utility connections and, for restaurants, grease-trap locations and venting. The standard lease generally does not take these issues into account and, absent clear definition, can present significant, unanticipated expenses.

Early on, landlords need to address the construction realities. Waiting for the space to be leased after shell construction — and assuming the tenant will deal with the basic utility fit-out — significantly increases costs, and it may make a desired deal difficult or impossible to complete. 

Similarly, how the property handles utilities can become a problem if not addressed up front. Landlords should spell out how tenants will pay for utilities and whether they will be on a separate meter. If there are shared meters, landlords should determine if tenants would be charged by the square foot or by use, and whether restaurants (often heavy users) will be charged disproportionately more for water, gas and electricity.

Signage

Landlords need to get their arms around the signage for the entire project. For instance, a high-end property may not want a myriad of signage colors, notwithstanding the protestation of tenants. In addition to their store signs, tenants will want the maximum amount of directional signage, including monuments and pylons, to help customers find them in a multi-building complex. Landlords should address this matter early on, as well as in the lease exhibits tailored to the development.

Parking

Parking is always an issue. Identifying the number of parking spaces available for tenants and whether parking is pay or free will avoid future problems. If the development utilizes pay parking, it must determine whether there will be a validation system. Tenants need to understand that landlords may tow customer, delivery or employee vehicles if the vehicles are parked incorrectly. Given that parking is critically important to any tenant, and that there will be conflicting uses for the same parking areas that vary greatly by time of day, this issue needs to be considered and documented carefully.

Calculation of Charges

Landlords need to be able to explain how tenants and users in the other phases of the project are going to pay their pro-rata share of taxes, insurance, shared areas and services. Any sophisticated tenant will want a clear explanation as to the assessment of these charges in order to be comfortable that it is paying no more than its fair share, both now and once the development is complete and fully occupied. These issues seriously can delay the lease negotiation if not packaged in a focused, intelligible manner.

Trash and Delivery

Tenants want to know where the trash dumpsters are and what the cost will be for trash pick-up. The system can be intermingled with the other components of the property and either handled by the tenant or by employees of the landlord.  Likewise, tenants need to know how to accept deliveries of merchandise and the hours available for delivery.

Noise and Odors

These issues are seldom a priority in typical retail leasing. However, when restaurants are near residential, office or hotel space, a restaurant’s hours, noise and odors give rise to new concerns. Landlords need to focus on permissible noise levels, controlling odors and, in particular, what can occur on the patio or other outdoor areas adjoining a restaurant or bar space. For instance, if a restaurant has entertainment, landlords are wise to restrict the entertainment from the exterior after a certain hour.

Casualty

Unlike the standard retail lease, a mixed-use project presents the possibility of an overhead casualty. Casualty could ultimately render a fair amount of the property untenantable, even if the tenant’s premises are not damaged. If the building is otherwise vacant, limited access or inconvenient parking will impact the tenants.

These considerations do not represent a thorough analysis of all matters that arise in a mixed-use property, but they provide a good beginning point for avoiding costly but foreseeable issues.

Abe Schear is a partner with the law firm of Arnall Golden Gregory LLP in Atlanta.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.