The Ups and Downs of Selling Outparcels

On behalf of Kaplin Stewart Meloff Reiter & Stein, P.C. posted in on Nov 1, 2016.

Although the market seems to be picking up, for various reasons the pace of development of new shopping centers remains slower than the glory days of the early to mid 2000s. A product that remains attractive is redevelopment of “value add” centers. In many cases, the prices are lower because the center is not fully performing, governmental approvals are easier because the municipality is interested in cleaning up eyesores and the population is already there, as opposed to waiting for it to come in a newer, developing area. However, developers/owners are challenged to find ways to finance the acquisition of centers that are not fully leased.

An effective way of squeezing money out of a center needing redevelopment is selling the outparcels. Often, outparcels are leased to national restaurants, banks, convenience stores and drug stores that attract buyers hungry to buy assets at low cap rates. Unfortunately, many centers are a single, unsubdivided parcel, so selling outparcels is not as easy as it sounds.

The first issue to deal with is how an outparcel will be created as a parcel that can be legally sold separate from the balance of the center. One alternative is legally subdividing the center under the applicable subdivision ordinance. For this to occur, all of the parcels created by the subdivision must meet the code, which is not always easy. There are various criteria that each lot must meet, and it is not unusual for the owner to find that its plan does not comply with code.

Another possibility is creation of a condominium. In Pennsylvania, creation of a land condominium – meaning drawing horizontal lines on a plan to create condominium units comprised of land only – has become more difficult. Recent court decisions require a property owner to obtain consent from the municipality to sell condominium units. Although the level of review could be less intensive than a subdivision, some municipalities now treat subdivision and condo as the same process.

The third alternative is creating a financial subdivision. A financial subdivision is an animal created by some municipalities’ zoning and/or land development ordinances. In this case, an owner is allowed to sell and mortgage separate lots within a single zoning parcel, but the zoning requirements continue to be applied to the larger parcel, not the individual lots. This seems to be the best of both worlds, but not many municipalities understand and permit this.

Regardless of what route is taken to create the lots, in each scenario, the newly created parcels need to be subjected to some sort of reciprocal easement agreement (an “REA”) so that the parcels can continue to enjoy the rights that existed before the parcels were created. Since there is only one REA document that will govern the center, each owner, and the tenant of the parcel, takes a bite of the apple in negotiating the REA, and the developer finds itself ping-ponging back and forth between various parties, each trying to make their best deal in one document. In addition, the tenants who pre-dated the REA have their own concerns about having their deals changed by an REA. Finally, and perhaps most importantly, the REA must be detailed enough to make sure that each parcel owner does not violate the leases on other parcels. This is easy to manage when a center owner administers all the leases, but far different when there are multiple landlords who may not even know what terms are in leases off of its parcel.

Selling outparcels can work, but it takes careful consideration and planning to make sure your bright idea is not darkened by the details.