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For owners of office and residential buildings, ground-floor retail space can pay big dividends in terms of premium rents and the status often associated with retail uses. But stores also pose challenges for owners who are unfamiliar with the interplay of retail operations in a mixed-use facility.

By the same token, chain retailers accustomed to the pre-planned environment of enclosed malls and strip centers or the do-your-own-thing power-center philosophy are often shocked to learn of the myriad hurdles existing in a street deal, particularly one involving an urban high-rise building.

There are several threshold reality-check items an owner or tenant should address. First, what is the nature of the building? A luxury residential or class A office building will necessitate the imposition of more stringent owner controls on the retail tenant’s operations. Second, what is the nature of the retail use and the user? An amenity use such as a bank branch or food-service operation is often critical to the class designation of an office building.

Also, the tenant must know from the early stages of a transaction if the owner has complete authority to negotiate a lease, particularly in terms of tenant privileges such as the right to make alterations, erect signage and affect an assignment or subletting. There might exist a ground lessor, condo or co-op board or lender with approval rights. The tenant must also determine whether or not the building is located in a historic-preservation district or has so-called landmark status.

An owner will want to manage the retail tenant’s permitted-use clause to ensure that it is narrow enough to preserve a healthy mix of uses among the several stores located within the building and to prohibit noxious uses such as nightclubs and betting parlors. From the tenant’s perspective, the owner should not be able to cannibalize its business by leasing other retail space in the building (or in an adjacent building with common ownership) to a competitor. The tenant may therefore require exclusive-use protection. These clauses can be tricky, especially in the food and financial-services sectors, and should be drafted with great precision.

If the retailer’s use is an amenity use, the owner may want to include a provision expressly requiring the tenant to continuously operate during regular business hours. On the other hand, the owner of a residential building will want to place limits on a retailer’s ability to maintain early-morning or late-night store hours.

Control issues will also likely surface in the debate over a tenant’s right to assign its lease or sublet its premises. For example, in the case of an amenity-use tenant, an owner may insist that an assignee or subtenant operate a comparable, or even the same, amenity use and that a national-chain tenant be replaced with another national chain and not a mom-and-pop operator.

A tenant’s right to erect signage will also be the subject of debate, especially with respect to the storefront and window showcases. For instance, an owner may want the tenant to adhere to building-wide sign criteria. On the other hand, a multi-store tenant will want chain-wide uniformity–the right to display its prototypical advertising posters and logo signage in order to maintain a consistent look and feel across all stores in its chain.

An owner may also want to regulate the tenant’s installation of exterior fixtures such as security gates, awnings, canopies and flagpoles. Other operational controls imposed by an owner may include the regulation of noise and odors, pest prevention and extermination and crowd control during promotional events.

Conversely, a tenant will have its own set of concerns regarding the owner’s operation of the common areas or public portions of the building. Specifically, a tenant will want to eliminate or reduce the effects of potential impediments to store visibility (such as scaffolding and newsstands) and pedestrian traffic flow (such as bike stands and news racks).

A tenant will have legitimate concerns about mundane items that it might otherwise take for granted in its mall and shopping-center locations. For example, if its store has an interior lobby entrance, the tenant will need to spell out after-hours and weekend customer access into the lobby. Delivery access is also often problematic. Which service corridors, freight elevators and loading docks will the tenant be permitted to use, if any? Will there be hidden fees or limitations imposed on the use of those portions of the building? Also, the tenant may want to designate the service corridors and other critical public portions of the building as protected areas that cannot be altered without its approval.

Even expense pass-throughs such as building-operating costs and real estate taxes require special attention. For example, the ground-floor retail tenant will not want to share the expense of maintaining elevators serving only the upper floors of the building. Similarly, owners in many jurisdictions will want their retail tenants to pay a disproportionately larger share of property taxes in light of the higher rental value of ground-floor retail space, which is factored into a building’s overall tax assessment.

If a retailer is inexperienced or unaccustomed to the labyrinthine layers of big-city bureaucracies, the owner may require that the tenant use an expediter to obtain a building permit and any liquor license, health certificate or other essential governmental approvals or documents. In the case of an existing certificate of occupancy, the tenant should be wary of relying on the stated permitted use of the store; the previous occupant may have been operating a so-called prior non-conforming use. All traps for the uninitiated.

Obviously, owners and tenants involved in street-retail leases within mixed-use facilities must proceed with extreme care, taking the time to spell out the details of items often given little or no attention in the controlled environment of a retail-only facility.

Ted Zangari is a member of Sills Cummis, a Newark, NJ-based law firm. He concentrates his practice on the development and leasing of commercial real estate throughout the US.

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