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Re-developing “Big Boxes:” Due Diligence is Key

The economic downturn has caused several “big box” retail stores, such as Circuit City and Linens n’ Things, to file for bankruptcy and close hundreds of stores.  The downturn has also caused several other “big box” retailers, including national chains like Walmart, Sears and Target, to re-evaluate their markets and eliminate underperforming stores, which has caused the closure of hundreds of more stores.[1]

When these “big boxes” close, their impact on the community can be very negative, as shuttered “big box” sites are visually unsightly, can attract vandalism and reflect a loss of jobs in the community.  Often, these sites remain vacant for months before a new tenant or purchaser is found.  And significantly, these closures can cause a strain on other local businesses that relied on the “big box” to attract customers to the area, potentially creating a domino effect of additional store closures, vacancies and job losses.  As a result, re-developing a “big box” site can be a win-win for the property owner, surrounding businesses and the community itself.  However, re-developing a “big box” site presents unique challenges for the owner and the proposed tenant or purchaser of the site. 

Leasing or purchasing a vacant “big box” is not a typical commercial real estate transaction.  There are particular due diligence issues that any potential new tenant or purchaser will want to consider, including the following:

  •  Many “big box” sites include restrictive covenants that may prohibit or limit certain uses of the property or any proposed re-development.  Those covenants should be thoroughly reviewed in the context of the anticipated use of the site by the potential tenant or purchaser.  
  • Most “big box” sites were developed for a single-purpose user, and the new tenant or purchaser will likely want to change the type of use.  This will likely require a zone change or other type of land use entitlement process.  In some cases, the “big box” may need to be partitioned from surrounding property as a separate parcel, which will also require land use approval.  It is imperative for the new tenant or purchaser to obtain all appropriate zone changes and land use entitlements before becoming contractually obligated to go forward with the lease or purchase.  Appropriate contingencies should be included in the lease or purchase agreement to provide for this.
  • The new tenant or purchaser will also likely want to undertake significant remodeling of the building and possibly the site to accommodate the new use.  Remodeling plans as well as desired changes to the signage, parking lot, access drives, landscaping islands, storm water drainage areas and similar areas will also typically require local governmental approval.  Often it is beneficial to engage local engineers and consultants as part of the due diligence team to assist with the due diligence and required approvals.
  • In multi-tenant centers, the loss of the “big box” may trigger co-tenancy clauses, giving other tenants in the center the right to terminate and vacate existing space.  A potential tenant or purchaser will want to confirm the status of other tenants in the center with the landlord.
  • If the site has been vacant for several months, and if the “big box” retailer has ceased paying rent on the site, it is likely the landlord has experienced a significant reduction in rental income from the property, which may have caused a default under the landlord’s financing on the property.  A new tenant should seek assurances from the landlord’s lender that there are no underlying defaults on the landlord’s financing, and that the lender will not disturb the tenant’s right to possession if the landlord defaults after the lease is finalized.

Former “big box” retail sites have been converted to gymnasiums and athletic clubs, call centers, schools and even churches.  As property owners and communities continue to try to fill these vacant sites, potential tenants and purchasers will need to pay particular attention to the issues mentioned above to assure the site will be suitable for their intended needs.

[1] “Big box” stores are typically described as large, industrial-style buildings, ranging from 20,000 to 200,000 square feet, with acres of surface parking lots.  They are often free-standing, but they can also be an anchor store for a shopping center with several other tenants. Historically, big box stores are located in suburban areas, where land for large buildings and vast parking lots is more available and affordable, but they can appear in urban areas, particularly where re-development has occurred.

  • Joseph W. West

    Joe has practiced in the areas of real estate, business and banking law in Oregon for more than 30 years. Joe’s real estate practice includes representation of owners, developers, tenants and lenders in a wide variety of matters ...

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