Real estate companies are spending millions to rejuvenate indoor shopping centers in suburban cities across the U.S., but some developers may not know that revamping a mall comes with unique legal challenges.
The contracts that underlie malls and govern how they work often involve complicated arrangements with tenants regarding how they can use the mall's buildings and what other kinds of tenants can or can't occupy space, according to interviews with attorneys.
Additionally, residents and city officials tend to care a lot more about malls than other kinds of commercial properties. Winning over the support of local community members and politicians is key to moving a mall redevelopment project forward, attorneys said.
"In nearly any town, the mall is going to be the largest single piece of real estate in that town. It's going to have an outsized importance to that town," said John Knuff, a land use and real estate partner with Hurwitz Sagarin Slossberg & Knuff LLC
Most people know the story of the rise and fall of the all-American mall over the last 40 to 50 years. Malls bustled in the 1980s and 1990s, but many across the country began to hollow out and fall into disrepair at the turn of the millennium.
The number of malls in the U.S. dropped from 1,500 in 2005 to 1,150 in 2022, according to a report by the Federal Reserve Bank of Richmond about two years ago.
Over the past several years, mall owners across the country have embarked on years long, multiphase projects to transform their indoor shopping centers into mixed-use hubs with housing, upscale dining, entertainment options, community centers, and, in some cases, hospitals and sports facilities.
Many of the projects repurpose the vacant building that department store retailers such as Sears, JCPenney and Dillards had previously occupied for decades, turning the boxy spaces into pickleball courts or arcades.
"One of the things that you'll often hear is making the mall an 18-hour destination," Knuff said. "There are a few hours where people will be sleeping, but outside of that, there will be activity taking place throughout all hours of the day and night."
Some recent research shows malls are starting to regain some popularity.
A study published last year by the International Council of Shopping Centers found 60% of surveyed members of Generation Z stated they visited malls to socialize and meet friends, even if they don't need to purchase something.
Foot traffic in malls fell dramatically over the pandemic, but most malls have since seen their numbers of visits return to pre-COVID levels, according to a report this year by mobile location platform Placer.ai.
Here are a few tips for attorneys who are working with real estate clients on a mall redevelopment project.
Understand the 'Legacy Documents'
A significant chunk of U.S. malls were built decades ago, and working with the fine print that governs these shopping centers can pose a major challenge for a developer who wants to bring something new or different to the space.
Julia Beckman, a real estate shareholder at Texas-based law firm Munsch Hardt Kopf & Harr PC, said a mall redevelopment project often calls for her to dedicate time and care to reading over the shopping center's decades-old "legacy documents."
"I have to walk them through these grainy documents that were digitized at some point in the last couple of decades, but they were drafted several decades ago, and we still operate under them today because they run with the land," Beckman said.
Beckman advised Reimagine RedBird, a development group, on its revamp of RedBird Mall, a shopping center built in 1975 in Dallas. The mall faced financial troubles in the early 2000s, and city officials and commercial real estate developers embarked on a plan to reinvigorate it around 2016.
The project saw the development group repurpose the big-box spaces that were once used by Sears and Dillards into a hospital and an academic medical center. They also built an apartment complex with 300 units of housing, including some units designated as affordable.
One important step Beckman said she took during the project was to guide the development group through all the various rights and stipulations spelled out in the mall's contracts.
Most malls are structured to include a handful of department stores that connect to each other through an inner network of passageways filled with smaller shops.
The big-box spaces often serve as entrances into the mall's core, with the major retailers using the space serving as "anchor tenants" within the larger property. Anchor tenants tend to be the biggest holders of space and are among the first to sign a lease, which in the case of malls are typically long term, lasting decades.
What the average mall-goer may not realize is that the contracts underpinning the relationships behind the big-box retailers, the smaller shops in the passageways and the owners of the mall's core, can be more complicated and restrictive than what a typical mall's layout might suggest on the surface.
"Those are old documents, and a lot of them say stuff like, 'You can't have a grocery. You can't have a drive-through. You can't have X, Y and Z," Beckman said.
The documents usually take the form of declarations or covenants, conditions and restrictions agreements.
"You're not dealing with the city, or a municipality, or a law that says you can't do something. You're dealing with, 40 or 50 years ago, a group of people who thought, 'This is exactly what they need here. Let's put these rules in place,'" she said. "And those last for a really long time."
Advising a developer who wants to introduce something novel to a mall often involves negotiating with the larger property's anchor tenants, if any retailers are still occupying the space, and attorneys need to address a range of insurance, security and access concerns between the different parties in their discussions.
Beckman said attorneys should pay close attention to how all the different agreements among the shopping center's tenants work together and be aware of how changing or terminating one contract might impact a party's rights.
The written agreements over access, insurance and maintenance can be complicated, because in a mall, everything is attached, and the documents themselves are based on old laws, she said.
Documents that were written in the '80s were "a little bit more laid back than they are today," she said.
"Time changes things, and so some of the provisions — you have to go on intent from those documents, because they're not compliant with laws today," Beckman added. "You might change something, or you might get rid of something, and not realize that you completely eliminated a crucial element of the overall operation of the mall."
Secure the City's Support
Overhauling a mall can involve a lengthy process of securing rezonings or permits for construction. Gaining support from key stakeholders — including local elected officials and community members — can help make the process move smoothly, attorneys said.
Gaining Dallas officials' support was critical to Reimagine RedBird's ability to carry out the RedBird mall project, Beckman said.
"The city's involvement is huge, from a financial standpoint and an influence standpoint," she said.
The development group has clinched about $27 million in financing from the city in total through grants and a loan, the Dallas Morning News reported last year.
Having the support of a local council member proved to be especially helpful for moving along the redevelopment of Paradise Valley Mall in Phoenix, said Ed Bull, a real estate shareholder with Burch & Cracchiolo PA.
Bull is advising RED Development, a company that bought Paradise Valley Mall from real estate investment trust Macerich in 2021, on a project to add residential complexes, office campuses and a grocery store to the property. The shopping center now goes by the name PV Mall.
Since the beginning of the project, the Arizona-based real estate company has been working closely with Phoenix City Council member Deborah Stark, who represents the district that includes the mall, Bull said. Stark formerly served as a planning director for Maricopa County, and RED Development had already established a relationship with her from previous projects.
Stark connected the developer to the key people and groups the company needed to reach to rally support for the project from local residents, Bull said.
"She provided us with a list of probably 10 or 12 neighborhood-involved people in the area, 360 degrees around PV Mall … with names or others of [homeowners associations] and block-watch leaders, and others like that, that we could proactively reach out to, and both listen to them and talk with them about what they'd seen in PV Mall, what they'd like to see at PV Mall, and how to get there," he said.
The developer also benefited from having a prior relationship with Phoenix's city manager, Bull added.
"It was very coordinated and positive," he said. "Nobody at the city rolling over and playing dead on anything, but they, RED and Macerich, shared a common goal of, let's take this thing that has evolved in an undesirable way and turn it into an asset for not only the acreage that the mall sits on, but the greater community as well."
Win Over the Public
Developers can, however, face some pushback from residents.
Bull said the community's response to the PV Mall project was mostly positive, but some residents criticized the amount of open-air space the planned redevelopment has, compared to the original mall.
"Change is typically scary to some and welcomed by others, and PV Mall was no different," he said.
Knuff, of Hurwitz Sagarin, said a challenge he faces when advising developers on mall redevelopment projects in Connecticut is the "psychological hurdle" with residents who are hesitant about change.
"There was that hurdle to overcome: 'Well, what do you mean, malls are changing? Maybe the malls in other places are changing, but not our mall,'" Knuff said. "That's one thing I learned very early on representing malls, is that towns are very proprietary about them, and they take a large amount of pride in their malls and how they're being operated and who their tenants are."
"It took some very candid conversations and open-mindedness," he added. "I think ultimately each town became receptive to each client's concerted effort to do what was best for the project and best for the towns."
His biggest advice for attorneys representing mall developers is to make sure they build trust with the mall's town.
"You need to advocate vigorously on behalf of your clients, but you always are honest and candid and trustworthy, and you do what you say, and you don't ever step back from that," Knuff said. "Because once you do, once you lose the town's trust, you will never regain it."
Attorneys who spoke to Law360 said the mall redevelopment projects they have worked on typically involved a "live, work, shop and play" concept, incorporating housing, entertainment venues for sports and other events, and open spaces where people can congregate and hang out.
"It's creating an environment where people can come, enjoy it, have fun and live there if they choose to," Bull said.
A redevelopment project can also serve as an opportunity to bring in something that the mall's surrounding community may need, such as a grocery store or housing.
"The need for malls to reimagine themselves has come at a time when housing opportunities have also come to the forefront of people's minds," Knuff said.
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