Phased Development of Retail Projects: Part 2 - Control of Site Plan and Uses
This is the second half of an article focusing on issues arising when retail projects are developed in phases. The first half of the article noted circumstances that typically lead developers to develop in phases and discussed allocation of site work costs and CAM costs. This second half of the article will address phased development issues such as site plan controls, use controls and exclusive uses.
Site Plan Controls
Permissible Building Areas: Anchors prefer to control the location of all shopping center buildings to maintain vista controls, and because of potentially significant effects of grading differentials, parking fields, access heights of other buildings and other matters. The developer is loathe to commit to precise building locations for future phases of a development because it may not yet know the identity of the occupants and may not even know if a building will be utilized for single or multiple occupants. A compromise is the site plan designation of permissible building area (PBA) in which buildings can be located. A site plan may also designate a maximum floor area for each PBA (or group of PBAs). The configuration of each PBA, and the extent to which its size exceeds the contemplated footprint of the proposed building, may be a function of the distance of such PBA from the applicable anchor.
Design: A developer may grant an anchor exterior design approval rights regarding other buildings, but should provide flexibility for distinctive design elements of national chains.
Construction Controls: Because existing anchors (and significant tenants occupying lesser square footage) will insist that phased development not impact their business operations during construction, developers should expect to provide adequate construction barriers, construction staging areas, temporary access, signage and general construction prudence. The developer should attempt to exact similar requirements from expanding anchors, as the developer must continue to provide quiet enjoyment to its existing tenants during the construction program. Often, major construction work is prohibited during peak seasons, so construction planning, coordination and management (both on and off site) is paramount. Some of these requirements may be relaxed if all staging and access for future phase construction is performed on the future phase parcel.
Signs: A reciprocal easement agreement (REA) or lease often includes a sign plan that depicts the precise design of pylon and monument signs. Developers of phased developments should also consider including more flexible sign criteria for future phases, including relaxed standards for anchors' signs, specifying the rights of future phase occupants to signage in existing phases, and addressing cost sharing issues (construction and maintenance), which often relate to the size of an occupant's allotted space on a sign face. When allocating positions, the developer should consider the needs of future anchors, which may require position shifting of existing satellite stores. A retailer that is not on top might not accept a mid-level position on a pylon or monument -- visibility to passing highway traffic may in fact make the bottom position more desirable.
- Parking and Access
Ratios: A developer may wish to retain the right in an REA to aggregate parcels in a future phase to satisfy parking ratios attributable to that phase (instead of having each parcel be self supporting), provided that governmental parking requirements are satisfied. However, it should consider entering into separate agreements with parcel buyers to limit the parking allocable to such parcel. Anchors will frequently insist upon guaranteed parking minimums throughout to minimize spill over during peak periods.
Other Parking Requirements: For future phases, a developer might relax requirements like parking space location and configuration (size/angles, etc.), parking structure location restrictions and limits on the maximum number of compact spaces.
Impact of Multiple Anchor Expansion: Who supports the incremental cost of deck or sub-surface parking if land is insufficient to accommodate expansion with surface parking? A developer may wish to require anchors to be reasonable and/or reduce the size of their respective expansion to accommodate everyone expanding at the same time. Also, a developer covenant to one anchor ensuring that sufficient land is reserved to accommodate an expansion should limit the size of that anchor's expansion and be subject to expansion rights of other anchors, all acting reasonably.
Driveways: A developer (or the owner of the parcel on which a driveway is located) should reserve rights to relocate internal driveways on future phases that do not affect access or change designated curb cuts. Frequently anchors will insist upon approval rights.
- Control Access
A site plan can further limit future phases by including each anchor's "control area". Anchors distant from a future phase may have only limited control rights. For example, if a future phase is outside an anchor's control area, the anchor might retain rights to enforce a parking ratio, but forego rights to approve changes to parking location and configuration, unless these are integral to its access to and egress from the public streets.
The REA should document the parties' rights to modify site plan controls. Usually, consenting parties are all parties with stores in excess of a designated floor area plus the developer (so long as the developer owns at least one parcel and, after that, the owner of a specified parcel or the owner of a parcel designated by the developer or the owner of a specified parcel. Giving approval rights to every pad owner might delay important revisions. An alternative approach is to require the consent of parties whose parcels aggregate a designated minimum percentage (say 75%) of the land area (or floor area) in the shopping center (assuming a clear and easily applicable definition of "shopping center" exists).
Traffic studies and parking analyses will also need to account for phased development. At the time of the initial development, developer, anchors and governmental authorities frequently require professional traffic studies showing that traffic circulation (on and off site) will work efficiently, safely and in accordance with good shopping center practice and governmental norms and will withstand pressure created by anticipated market share growth. Parking analyses should consider the following: (a) changed conditions in later years, (b) the impact of higher traffic volumes (from changes in the operators of the stores) upon the road network and circulation system, (c) the allocation of costs for new studies and required changes, if an anchor insists upon re-visiting the traffic control system, (d) the extent of existing anchors' approval rights over new occupants whose operations are likely to surcharge the parking facilities and the internal road network, and (e) the effect of an anchor's expansion on the parking and the road network.
Use Controls / Exclusive Uses
The complications that inevitably arise from granting exclusivity rights in a center are exacerbated in the context of phased development. The developer's best approach to giving anchors exclusivity may be to request a "give none, take none" approach so that the developer has fewer problems bringing in other anchors in future phases. If this is not feasible, the developer should consider the following approaches.
- Define the "Shopping Center" to Exclude Developable Areas in Future Phases: This will not work if the future phases are integral to the development (for parking, access, governmental requirements, etc.) or if the anchor has sufficient bargaining power to require that it retain exclusive control of these areas.
- Define the Exclusive Narrowly with Respect to Other Anchors: For example, a supermarket or home improvement center exclusive may apply to retailers in excess of a designated size but the large retailer would not be subject to the merchandise line component of the exclusive. For example, the large retailer could not operate principally as a supermarket or home improvement center, but would not be prohibited from selling carpeting, appliances or electrical items (as to the home improvement center exclusive), or fruit or bakery items (as to the supermarket exclusive). This flexibility would be in addition to any "incidental" sales protection and any "use it or lose it" requirement that would ordinarily be negotiated. Provide that uses noncompliant with the exclusive are permitted if the consent of the anchor imposing the exclusive (and perhaps the developer) is obtained so that other consents need not be sought. Note, however, that some mass merchandisers' policies are to reject all restrictions upon operation.
- Retailers' Exclusive Rights in Later Phases: If a significant retailer in a later phase requires that its exclusive encumber portions of the earlier phase already sold or leased, the REA can impose such exclusive, without restricting any earlier phase retailer's existing use or affecting any earlier phase building over a designated size (and without contradicting use provisions in existing leases in earlier phases).
- Use Restrictions: Although "nuisance" use restrictions (such as flea markets, non-retail uses, car dealerships, etc.) should apply to future phases, restrictions imposed for competitive reasons (e.g. pharmacies and pet stores for a Target type anchor) or parking reasons (e.g. theaters and health clubs) should exclude future phases, or prevent earlier phase occupants from enforcing them against later phase stores that are physically distant.
Developers face numerous risks in attempting to simultaneously satisfy the construction, cost and use demands of its lender, anchors and other tenants, whether or not developing in phases. But if phased development is likely, a developer that fails to address and resolve the timing and allocation of the parties' competing interests risks substantial cost surprises and disputes down the phased development road.
Authors: The authors of this article are Fredric L. Carsley, Esq. and Sheldon A. Halpern, Esq. Mr. Carsley specializes in commercial real estate law and is a partner with Mendelsohn SENC, a law firm located in Montreal, Quebec, Canada. Mr. Carsley is currently the Divisional Government Relations Chair for the Canadian Division of the International Council of Shopping Centers. Mr. Halpern also specializes in commercial real estate law, with an emphasis on shopping center development, and is a partner with Pircher, Nichols & Meeks, a real estate law firm located in Los Angeles, California, USA with an additional full-service office in Chicago, Illinois, USA. Editorial contributions were made to this article by Steven P. Heller, Esq., an associate with Pircher, Nichols & Meeks based in Los Angeles, California, USA.