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Revisiting Credit Support in Early Sale Transactions
In early sale transactions, particularly those involving lifestyle shopping centers, the seller may be faced with the prospect of closing the transaction prior to the date on which each of the tenants' opening co-tenancy conditions have been satisfied. To the extent that a tenant's opening co-tenancy conditions have not been satisfied, such tenant, if open, is likely paying a reduced rental, whether tied to a percentage of minimum rent or a percentage of gross sales. Sometimes the reduced rental applies only to minimum rent; other times it includes common area charges, insurance, and taxes. As a result, the project is not generating its maximum level of income, thereby resulting in a lower income stream for the purchaser at closing. To avoid a reduction in the purchase price as a result of such opening co-tenancy rental relief, the seller can make post-closing payments to close this income gap.
Mechanics
Similar to the income support mechanics, the parties will need to establish a number of procedures to address the seller's opening co-tenancy support obligations. First, the parties should identify those tenants which, as of the closing date, are not required to open or are entitled to pay a reduced rental as a result of the failure of an opening co-tenancy condition. The seller's objective in this regard is to designate the specific tenants with respect to which the seller will be required to make opening co-tenancy support payments. By establishing the seller's opening co-tenancy support obligations with a defined universe of tenants, the seller can more easily quantify the cost and extent of its post-closing opening co-tenancy support obligations. Moreover, it eliminates the possibility that the seller becomes responsible for opening co-tenancy support payments for additional tenants for unforeseen reasons. For example, at closing one or more leases may be signed but not income producing. The opening co-tenancy requirements may be satisfied with respect to such leases at the time of closing, but prior to such time as the tenant under such lease opens for business, one or more tenants cease operating at the project. As a result of such closure, the tenant under such lease may then be allowed to pay a reduced opening co-tenancy rental. Inasmuch as the seller would not bear the risk of post-closing tenant closures if the project were sold when fully income producing, the seller should not bear such risk in the early sale transaction.
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