Small Business Taxes & ManagementTM--Copyright 2010, A/N Group, Inc.
There are more than a few malls and strip centers around the country that have a significant amount of vacancy. While some of these may become occupied in the near future, many could simply deteriorate. Moreover, even the best of areas are subject to change because of changing demographics, traffic patterns, new malls, etc. A mall or strip center that's fully occupied today could become a half-vacant eyesore several years from now. Remember, as a tenant you are generally liable for rent on the premises for the term of the lease, no matter what happens to the center. (Worse yet, in the case of a small business, the owner/shareholders may be personally liable.)
There are two ways to protect yourself from future problems. A center that is much less than 80% occupied is often no longer a draw; in fact, a center that is less than 50% occupied can actually scare away prospective shopper. You should have a clause in the lease that allows you to cancel the lease if the occupancy level is less than a certain percentage for a specified period of time. For example, if the occupancy level remains below 75% for more than one year. Talk to a real estate professional and an attorney for the threshold and the wording. Alternatively, you might consider a clause that adjusts your rent downward to reflect the decreased attractiveness of the center.
Another problem can arise with respect to expense recoveries such as CAM (common area maintenance) and real estate taxes. These expenses are usually charged back to you using a formula based on your area to the total area of the center. That may not be onerous. However, some leases allow the landlord to use a formula that compares your area to the occupied area of the center. Since the occupied area is less than the total area, your share of the expenses is larger. Thus, the higher the vacancy of the center, the larger your share of the expenses. There are other variations here. Clearly, you don't want to be penalized for vacancies in the center. Again, check with your attorney and a real estate professional.
If you're already in a lease, you should be considering such a clause and possibly other protection on any renewal or if you're moving to a new location. In many areas of the country the market is soft, making this is a particularly good time to negotiate better terms.
Copyright 2010 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 09/14/10