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Silvestri Law, P.A. Aug. 13, 2020

Credit: National Real Estate Investor / Getty ImagesNational Real Estate Investor recently interviewed Larry Silvestri on the speculation that e-commerce giant Amazon could be planning to open distribution centers in vacant big-box mall spaces. See an excerpt from the article below:

Perhaps more than any other modern company, e-commerce behemoth Inc. has disrupted the retail landscape. Within that territory, Amazon is now poised to shake up the retail real estate sector.

The Wall Street Journal reported on Aug. 9 that Amazon is exploring a partnership with Simon Property Group Inc., the country’s largest mall owner, to convert empty Sears and J.C. Penney spaces into Amazon distribution centers. Two days later, CNBC reported that Amazon might open some of its new large-format grocery stores—not Amazon-owned Whole Foods locations or Amazon Go no-cashier convenience stores—at Simon properties.

…It’s unlikely that an Amazon distribution center would qualify as a retail use, according to Larry Silvestri, a commercial real estate attorney in St. Petersburg, Fla. Therefore, a retail-to-industrial transformation might be restricted under zoning rules that have been on the books for decades. In addition, such a conversion might violate a reciprocal easement agreement between a mall developer and the remaining anchor tenants, says Silvestri, who has extensive experience in retail real estate.

Co-tenancy clauses might also stand in the way of an Amazon distribution center occupying an anchor space at a mall. A co-tenancy provision in a lease requires a landlord to maintain a certain share of operating space within a retail center or to keep certain anchor tenants open. If a percentage of space or a specific store stays empty, a co-tenancy clause might let an in-line tenant insist on rent concessions or even back out of a lease.

But a retail giant like Indianapolis-based Simon, the owner of the largest retail real estate portfolio in the country, wields negotiating power over tenants that a smaller landlord might not hold, Silvestri points out. So, Simon might be able to overcome tenants’ objections to an Amazon distribution center, particularly since a lot of retail tenants are seeking rent relief during the coronavirus pandemic, according to Silvestri.

“I suspect that Simon has the ability, in some of its malls, to do this now without a lot of heavy lifting,” he says. “But at others, there might be some heavy lifting needed to deal with these issues.”

On top of that, Silvestri suspects that most co-tenancy clauses at Simon properties still favor Simon.

Another advantage for Simon, according to Silvestri: It contributes a pile of property tax and sales tax revenue to the communities where it owns and operates retail centers. That could buy it some goodwill with local officials who control zoning.“I have a great respect for the vision and the ability of Simon executives to plan this out and not go off half-cocked, and Amazon also has a certain degree of political clout at the national level,” he says.

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