Mall owners, faced with rising vacancy rates in the recession, are being forced to accept lower rents from their remaining tenants.
Real estate investment trusts that own retail properties are being snagged by co-tenancy clauses that let merchants pay less when anchor tenants like department stores shut down, according to Real Point LLC data based on loan-servicer reports.
"A year ago, tenants in major shopping centers were rarely invoking co-tenancy clauses," said Charles Daroff, a partner at Hurtuk & Daroff Co., a Cleveland law firm that specializes in real estate. "Today, with the disappearance of major tenants and increasing vacancies, these clauses are being triggered."
The decline in rental income could hurt mall owners' ability to make debt payments at a time when some are on the brink of insolvency, said Andy Day, an analyst of commercial mortgage-backed securities at Morgan Stanley. Lenders may demand more onerous terms when refinancing debt, he said.
A growing number of shopping center owners are falling behind on loan payments.
The 60-day delinquency rate on retail property mortgages that were bundled and sold as bonds is 0.96%, compared with 0.32% in September, Morgan Stanley data shows.
Co-tenancy clauses are built into leases to ensure that tenants get the foot traffic they pay for. If an anchor store leaves, smaller tenants often have the right to pay less rent until the space is filled. If it is not filled, other retailers in the shopping center may be allowed to break their leases and leave.
For example, Linens 'n Things Inc. was one of the largest tenants in Plaza at Cedar Hill, a 299,847-square-foot (27,857-square-meter) shopping center outside Dallas owned by Kite Realty Group Trust. The retailer closed its store there in May, the same month it filed for bankruptcy protection. In August, Gap Inc.'s Old Navy stopped paying base rent and instead paid 2% of sales, according to the loan documents.
TJX Cos.' department store Marshalls will begin paying 2% of sales in place of base rent if the space remains empty at the end of February.