September 8, 2014
Hurdles Of Shopping Center Outparcel Redevelopment
By Kathleen Dempsey Boyle, Pircher Nichols & Meeks
A fast-growing element of shopping center
redevelopment is the conversion and refurbishment of
shopping center outparcels from outdated uses.
Investors are enticed by well-located outparcels on the
outskirts of existing shopping centers. Anchor stores in
regional malls may want to convert their underutilized
parking lots into a revenue source by carving out and
leasing part of those lots to new users. However,
decades-old restrictions governing the use and
operation of shopping centers and outparcels may
hamper outparcel redevelopment in unexpected ways.
Monitoring those restrictions closely are the shopping
Kathleen Dempsey Boyle
center developers wanting to protect their occupancy
rate and tenant mix (and perhaps having their own redevelopment plans). Lenders also
consider the scope and interpretation of these restrictions when underwriting loans.
Most retail developments operate under recorded agreements that manage and restrict
the development, construction and operation of the shopping center that will be referred
to in this article as “REAs.” A variety of REAs govern outparcels. The regional shopping
center developer may have folded all outparcels into the definition of the shopping
center so that each outparcel is subject to every obligation under the REA. Alternatively,
a shopping center developer may have created a subset of less onerous restrictions
within the original REA that apply only to outparcels, or a developer may have recorded
a separate REA against individual outparcels that imposes restrictions while preserving
access across shopping center land to public streets.
Traditional Outparcels — Traditional Restrictions
REAs traditionally restrict the height of outparcel buildings, their signage, their use and
parking. However, the REAs did not necessarily contemplate modern features such as
drive-through lanes and special architectural elements.

Height restrictions. Older REAs may have stated height restrictions as a “plain
vanilla” linear footage limitation or as a limitation tied to building stories (onestory, two-story). Now restaurant and retail operators want to incorporate
architectural features such as steeples or decorative front entrances as part of
their branding efforts, which was not anticipated by the REA drafters. The
shopping center developer may successfully assert that all building elements are
subject to the height restriction.

Parking. The last thing shopping center or anchor store owners want is overflow
parking from an outparcel encroaching onto the center’s parking lots. Parking
restrictions may require that an outparcel be self-parked at a certain ratio or a
ratio tied to the zoning applicable for the building’s size and/or use. This limits the
ability of an outparcel owner to expand the building or convert to a parkingintensive use. Other styles of parking restrictions impose overall ratios on a
center, which may create ambiguity as to whether such ratios also apply to
outparcels.

Signage. Many outparcels have buildings that are awkwardly sized for current
uses, and an owner may want to fit multiple tenants into one outparcel building.
However, REAs may limit exterior signage to one sign on one side of a building,
one sign per building side, or to no more than one sign per main entrance to a
store. For example, signage restrictions may prevent an outparcel owner from
dividing an obsolete restaurant building into two fast casual restaurants with
separate exterior signage.

Site Plan Restrictions. The shopping center owner (and other REA parties) may
have the right to approve any changes to a site plan previously approved in an
REA. This occurs most often in REAs for regional centers. If an outparcel owner
wishes to change a building’s footprint, reconfigure parking, add a drive-through
lane or change curb cuts, all such changes affect the site plan and often must be
approved by the REA parties.

Use Restrictions. An REA affecting an outparcel might preclude non-retail uses,
thereby constraining an outparcel owner from operating office or service uses
such as medical or dental offices. Uses with heavy parking requirements, such
as theaters, health clubs or churches, might be precluded on larger outparcels.
Grocery-anchored centers may have REAs that dictate uses according to the
locations of outparcels within a center. The definition of “retail” may either be
undefined or so narrowly defined that uses that consumers may now consider to
be retail (optical shops, spas, restaurants) are precluded under the REA.
Control Areas — A Shadow Restriction
A shopping center owner may have agreed to maintain existing restrictions on land that
includes one or more outparcels, giving a tenant who is not an REA party control over
an outparcel. For example, protection of sight lines from roadways is of prime
importance to shopping center tenants with exterior signage, such as anchor stores and
big box tenants, and a shopping center owner may agree to enforce an existing height
restriction on an outparcel to protect that tenant’s visibility. Having control areas
constrains the ability of a shopping center developer to agree to an outparcel owner’s
request to change a restriction.
Anchor Store Outparcels — New Challenges
A recent trend is the efforts of anchor store owners to create value by developing and
leasing an outbuilding in its parking lot. Ironically, given their location within the
shopping center ring road, such areas are likely subject to the full force of regional
shopping center REA restrictions rather than REA restrictions applicable solely to
outparcels. The new outparcel building causes all of the traditional REA issues
described above to come into play.
Adding an outparcel to an anchor store’s property brings up other interesting challenges
under the REA. Sometimes an REA places more comprehensive restrictions on the
shopping center developer’s parcel than the anchor store parcels, as the developer will
be leasing the center to multiple tenants selling a variety of goods and food as well as
managing the common areas of the center. Will less comprehensive restrictions on an
anchor store parcel inadvertently benefit an anchor store outparcel as compared to the
developer’s property? It depends — and will be a factor for the other REA parties in
evaluating any request seeking a change from the existing REA.
In any event, the anchor store owner is placed in the position of a mini-developer who
must seek the approval of all of the other REA parties to permit the new outparcel or
risk litigation. In its new role, the anchor store likely must engage in a protracted
approval process, which will require endurance and a willingness to trade its approval of
another REA party’s development request for approval of its desired outparcel. The
extensive REA regulations that may have been demanded by an anchor store decades
ago now constrain rapid outparcel development on anchor-owned land.
The traditional outparcel owner and anchor outparcel owner must run a gauntlet in
attempting to redevelop outparcels in a manner that may be precluded by existing
restrictions. When contemplating approvals, the outparcel owner must determine which
owners have the right to approve changes to outparcel restrictions as well as the scope
of those approval rights. In the background are shopping center developers who want to
preserve the viability of their centers, non-REA party tenants with control areas, and
lenders underwriting loans who seek clarity as to the scope of their borrowers’
development rights.
Kathleen Dempsey Boyle is an of counsel with national real estate law firm Pircher,
focused on leasing and development in the Chicago office.