Joint Venture Retailing. Is it right for you?

In the new reality of commercial leasing developers and shopping center owners are creating new ways to fill vacancies. One of those alternatives is forming joint venture partnerships with tenants who are hesitant to open new locations.

I've been involved in several such deals and believe the ultimate success lies in the owner/developers ability to negotiate a well structured deal that provides for a proper exit strategy. The JV with retailers works in the following way. The property owner typically pays for most of the T/I minus tenant specific fixturing or a full turn-key build-out.

The tenant remains in full control of the premises and they function normally with no further involvement from the Landlord. In return, the owner receives a percentage of the sales volume in addition to monthly rent. Rent is typically adjusted marginally higher than market to compensate.

On the surface, this type of JV seems to have it's merits. The Landlord fills dark space, receives income that he otherwise would have missed and has a vested interest in the success of the tenant. The tenant's position is financially stronger due to lower or non-existent construction costs and he gains a limited partner who's success goals are the same.

However, problems with this type of arrangement are that the property owner loses leverage in not only collecting rents, but enforcing other areas of the typical lease agreement.

The JV agreement typically puts property management in the unenviable position of having to deal with both it's fiduciary duties to the owner and it's obligations under the lease terms. Property management is caught in a catch-22 situation whereby how does it ethically and morally meet it's obligations to all parties?

Other questions that need to be answered include; Is it really in the best interest of the landlord/owner to to have a vested interest in the tenant? How does it effect the performance of the center? What effect does the relationship have on other non-JV tenants? What legal obligations does Landlord and property management have should this tenant fail?

Even with answers to the above, having a multi-tiered exit strategy is advised.

Landlord/owners need to devise exit strategies that can remove them from the JV in a timely, systematic and orderly fashion. The divestiture needs to be well conceived and documented with the establishment of set parameters and time lines that must be adhered to in order for each party to successfully maintain it's autonomy.

It is my belief that joint venture retailing can succeed if properly vetted and executed. In the new world that is commercial leasing, this and other creative options must continue evolve in order to ensure survival.