Protecting Retail Performance from Co-Tenancy

Co-tenancies have always posed a challenge for retail portfolio management. Learn how Prophia can help you track, mitigate, and remedy multiple co-tenancies within a single, streamlined platform.

As a retail property owner or operator, you've likely encountered co-tenancy. While these provisions aim to offer accommodations to retail tenants if a key tenant vacates, retail portfolios containing one in-effect co-tenancy may lose out on a portion of their income. Multiply this number by the average number of tenants per property, eight (according to the retail data currently on Prophia’s platform), and it puts into perspective how much a single retail property has to lose due to encumbrance violations.

With retail rents up in every sector, it’s more important than ever to eliminate portfolio exposure related to overlooked tenant data. However, pulling together and tracking every detail relating to every tenant with an encumbrance, like co-tenancy, can be challenging—especially if you manage multiple multi-tenant properties.

Enter Prophia: a vertical AI solution built for CRE. Using the most comprehensive digital library of private, real CRE contract data, Prophia makes it possible for retail property and asset managers to track and manage the specific legalese included in critical dates, ROFOs/ROFRs, co-tenancy provisions, and more, making it possible to proactively manage in-place encumbrances and maximize a property’s earning potential.

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The Impacts of Co-Tenancy on Retail Performance
How Prophia Enables Action Faced With a Co-Tenancy
Managing All Retail Tenant Obligations With AI

The Impacts of Co-Tenancy on Major Retail Asset Types

Co-tenancies can be disruptive if they aren’t effectively managed. They can impact relationships with tenants, delay openings, diminish earnings, and even impact the way retail space is bought and sold. What’s more, the co-tenancy clause can affect different retailers in a variety of ways. From outparcels to strip centers, every management team with an anchor tenant on their retail property needs to track co-tenancy.

Power centers.

Power centers or big-box centers often contain multiple anchor tenants in a single location. For instance, a power center might have a Home Depot, Walmart, or Sam’s Club located on the same plot with smaller retailers. These multi-tenant retail locations are typically 250,000 to 600,000 square feet and their anchor tenants occupy between 75-90% of the total area.

In a retail arrangement like a power center, a portion of tenant rent is often percentage-based and tied to sales/revenue. So when a space becomes vacant, especially when a key retailer moves on, that can significantly affect the income of remaining, in-place tenants, and drive down rents for a significant time.

Pad sites.

A pad site or an outparcel is a freestanding property unit located in front of a shopping center or strip mall. They offer retailers expansion opportunities when occupancy in the main retail building is high. Due to their placement, often out in front of a large parking lot, they are also highly visible from major roadways and a good draw for commuters.

Pad sites are highly appreciable multi-tenant assets, but they require proper management for maximum capitalization. To build on a pad site, management teams have to understand the ins and outs of every one of their tenant’s lease obligations relating to parking, radius restrictions, etc. If not, impediments can trigger contractual violations, cause in-place tenants to leave, and, if you have any co-tenancy, potentially cause you to lose money from the tenants that remain.

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Strip centers.

Strip malls are open-air shopping centers where the retailers are often arranged in a line, an “L” or “U” shape. These plazas can range in size from 5,000 square feet to over 100,000 square feet. Strip centers rely on maximal occupancy because these retail arrangements don’t always have a big box store guaranteeing foot traffic.

Co-tenancy can provide strip center tenants with protection if occupancy rates dip below a certain threshold, making it an incredibly attractive provision for retailers looking for options to protect their business revenue from market challenges. Unfortunately, having a single lease or multiple leases in a retail portfolio with this provision can make it difficult to effectively manage your property’s income.

Grocery-anchor.

Grocery anchors are incredibly resilient properties providing shopping centers with steady foot traffic and revenue when the economy underperforms. Purchasing retail space attached to a major grocery chain, like Kroger, Whole Foods, or Market of Choice, provides lenders with low exposure and even protection against co-tenancy privileges.

Malls.

The Burlington Arcade, the Passage de Caire, and The Arcade in Providence were some of the first covered shopping passages in the world and they helped usher in the mall era that took hold in America after WWII. Malls are massive properties clocking in at 500,000 to 800,000 square feet and can have hundreds of tenants. The largest mall in the world has over 5,000,000 square feet of gross leasable space and is located in the Philippines.

In recent years, malls have faced epidemic-level closures with marquee retailers like Nordstrom, Macy’s, and JC Penny shuttering their storefronts amid security concerns in city business centers and challenges keeping up with online sales. When these massive retailers vacate leaving 100,000 square feet or entire floors empty, foot traffic to smaller retailers like Madewell, Foot Locker, Adidas, etc. all but disappears forcing tenants to negotiate rent terms, like co-tenancy, that allow them to stay open when customers stop walking through the doors.

How Prophia Enables Action When Managing Co-Tenancy

In a highly competitive market, where occupancy dynamics can shift on a dime, CRE teams need to fully understand every detail relating to tenant encumbrances. This goes double for an agreement, like co-tenancy, that can directly impact rent amounts. Unfortunately, the crucial details of these encumbrances are often the first data points to become buried by unstructured portfolio data.

Tracking co-tenancy thresholds.

The co-tenancy threshold that defines the vacancy benchmark provides property owners with key information about the conditions they must uphold to avoid triggering co-tenancy relief. This includes maintaining a certain property occupancy rate, such as not allowing it to dip below 60%.

With a tool like Prophia that can automate and track over 200 CRE terms found in lease contracts, asset managers can get out in front of managing their portfolio’s vacancy schedule.

For instance, Prophia’s dynamic stacking plan uses specific color coding to illustrate lease expiration dates as well as tenants with MTM or YTY leases. This gives asset and property managers an incredibly detailed view of their property’s overall vacancy and, when cross-referenced with the terms of a co-tenancy threshold, the opportunity to mitigate a co-tenancy violation.

Taking action during the cure period.

If your portfolio’s occupancy dips below the threshold or a major retailer suddenly vacates their space, Prophia can help your team take quicker action, remedy a violation, or exercise cure rights to avoid exposure due to a co-tenancy.

With a dynamic search feature, asset and property managers can query every lease in their portfolio at once and easily find specific language relating to co-tenancy. Unlike managing tenant terms manually or in a series of spreadsheets, Prophia captures and standardizes lease terms so management teams have immediate access to time-sensitive items like cure rights.

What’s more, Prophia guarantees the accuracy of your lease data by hyperlinking every term in your lease summary back to the original document. This makes it possible for teams to spend time taking action not verifying or validating their lease data.

Avoiding future encumbrance violations.

Retail expansions, upgrades, acquisitions and sales are all impacted by tenant encumbrances. If your team doesn’t have a process in place for tracking and aggregating tenant data, growth opportunities, portfolio optimization, and even your speed-to-leasing could be at risk due to mismanaged tenant encumbrances.

In the case of co-tenancy, the key to effectively mitigating violations is to track occupancy rates and your vacancy schedule well ahead of the threshold. If this is something you and your team have done manually for ages, dividing and conquering tenant data aggregation every time you’re preparing to grow your retail portfolio, Prophia will transform the way you manage encumbrances for the better; saving your team valuable time, resources, and expenses.

Effectively Managing All Circumstance-based Tenant Obligations With AI

Staying on top of all of your retail tenants’ unique contractual rights and options can be incredibly challenging. This goes double if your portfolio contains multi-tenant buildings, like retail property. In this case, your team could be tasked with managing hundreds of encumbrances, including co-tenancy, that directly impact revenue and performance.

Give your retail portfolio its best chance to thrive in the market and among increased demand for tenant incentives. With Prophia, asset managers and leasing professionals can proactively manage and track the details of retail contracts to get ahead of tenant options like rent relief related to occupancy. Additionally, when every member of the asset management team is looking ahead and referring to the most up-to-date portfolio performance metrics, every renewal discussion and negotiation is handled with confidence and leverage.

Prophia’s AI accurately captures the details of retail leases creating a dynamic and interactive lease summary that anyone tied to your team can access at any time. With Prophia-synthesized portfolio data, it’s simple to surface critical tenant details, like those on co-tenancy, through our platform’s dynamic search, so you know the precise timing and conditions of tenant relief clauses. There is no more guesswork or all-hands-on-deck exercises. Prophia makes portfolio management simple, sophisticated, and based on accuracy.

If you would like to harness the power of AI specifically designed for CRE, contact the Prophia team to learn about reporting, data visualization, and customization options.