Shopping Center Business

JUN 2018

Shopping Center Business is the leading monthly business magazine for the retail real estate industry.

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LEGAL ISSUES 56 • SHOPPING CENTER BUSINESS • June 2018 on a retailer with multiple stores that is attempting to develop and implement a viable reorganization strategy, usually op- erating under significant pressure from a lender torn between the desire to support a feasible re- structuring plan and the com- peting need to recognize when a liquidation is inevitable. That lender may also want to maxi- mize its recov- ery through an orderly "going out of business" sale. The 2005 changes also re- quire retailers to pay in-full for all inventory and other goods received within 20 days before the bankruptcy filing date. That can be a sig- nificant cash drain that further impairs the ability to reorganize. GETTING CREATIVE WITH DEVELOPMENT Widespread distress in the industry is leading to new approaches. Short-term and long-term redevelopment opportu- nities are in high demand, and some de- velopers are making the most out of it by getting creative. For example, some abandoned malls have been revitalized into new mixed- use concepts that combine retail, office and residential space. Examples include the former McAlister Square Mall in Greenville, South Carolina, which was repurposed into a retail and educational complex home to seven colleges, and a mixture of restaurant, office and retail space. Similar redevelopment is afoot in other aging malls in North Carolina, including the City of Charlotte's propos- als to redevelop the Eastland Mall site, the plans to change the enclosed Inde- pendence Mall in Wilmington to a gro- cery-anchored, open-air destination and the planned repurposing of the Asheville Mall into an upscale mixed-use facility with housing, retail, and restaurants. Each of these projects involves the reuse of some existing buildings and infrastruc- ture, combined with construction, to cre- ate a new experience. This redevelopment mimics the types of new construction aimed at attracting the modern consumer, such as Stonewall Station in Charlotte and Fenton in Cary, North Carolina. These projects provide mixed-use destinations and experiential retail that create a sense of place, encour- age lingering and offer a unique experi- ence not found in the typical strip centers of the 1980s and '90s. This movement — toward all-in-one retail, with restaurants, fitness centers, bowling lanes and other activity-focused businesses — is all about the feeling of the experience, not just the name recognition of the tenants. More emphasis is thus placed on the outdoor spaces, furnishings and unique historical or environmental elements of the site. With the rise of social media and the de- crease in car dependency to access retail, the walkability and signature look of these developments has become a way that some developers have created value. The goal is creating more reasons for shoppers to come, stay and post about their visit. These concepts can be adapted in older centers to create a blend of old and new, historic and contemporary, in ways that drive value. MITIGATING RISK IN THE NEW NORMAL Whether you are repositioning an exist- ing shopping center or developing a new one, there are a variety of steps owners and lenders can take to reduce their risks. In addition to having a comprehensive understanding of the relevant local mar- ket, it is critical for owners to understand prevailing lender sentiments about rent levels, reserve requirements, co-tenancy issues (discussed further below) and the like. Projects geared toward high-income and high-density demographics seem to be in particular vogue in many markets. It is important to temper enthusiasm for such projects with a dose of realism about retailer expansion plans, construction fi- nancing availability and concerns about end-of-cycle risk. When negotiating leases, it is impera- tive to pay careful attention to co-tenancy clauses that give a tenant rent concessions (or even the right to terminate the lease) if the rest of the shopping center is not leased to a certain percentage. That per- centage is nearly always negotiable, so owners and lenders should do a careful analysis to determine what is appropriate in each market. It is also important for shopping cen- ter owners to recognize that commercial lenders are increasingly focused on en- suring compli- ance with finan- cial covenants. Gone are the days when an ability to scrape together enough cash to make re- quired debt ser- vice payments was sufficient to keep the bank happy. Sophis- ticated lenders and other in- vestors are now digging below the surface and evaluating short and long-term financial viability by way of financial covenants. They are using any actual or impending violation of those covenants as leverage to obtain concessions designed to help the lender's bottom line (often at the expense of the owners). Those are just a few of the ways project owners and lenders can make the most out of the changing trends in retail. For help navigating specific challenges and opportunities, it can also be valuable to consult with attorneys who have deep ex- perience in this area. SCB Chip Ford is a partner in Parker Poe's Financial Services industry team. He can be reached at chipford@parker- poe.com Jamie Schwedler is the leader of Park- er Poe's development services industry team. She uses her prior experience as a landscape architect to advise devel- opers and landowners on a full range of real property and development matters. She can be reached by email at jamieschwedler@parkerpoe.com Chip Ford Partner Parker Poe Jamie Schwedler Partner Parker Poe

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