Creating Healthy Shopping Centers
Medical tenants are making a push into retail spaces as the U.S. population ages and medical science evolves. Here are some issues to look out for when negotiating leases with medical tenants.
Abe Schear

The last 25 years have seen the growth of multiple retail concepts — outlet malls, power centers, lifestyle centers, grocery-anchored centers (with more in-line square footage than the grocery store), the exodus of theaters from the mall, the return of theaters at the mall, the birth and maturity of Costco and Target and Wal-Mart, to name but a few. Similarly, we have witnessed the rapid growth of health care as our population ages and medical science evolves. With increased expectations as to healthcare access, it is certain that medical providers will find the need to be closer to the user, particularly as we become more intolerant of wasting time (actual or perceived).

While we cannot guess exactly what will be built when development picks up, we can hypothesize what will fill empty space. Toward that end, I am reminded of the story a decade ago when I intolerantly asked a landlord client why he was leasing to a rehabilitation center in a brand new grocery-anchored shopping center. His answer now rings so true, “First, the tenant has better credit than any retail tenant. Secondly, the trading area of the center is expanded as people come from 5 to 10 miles away to visit the facility. Thirdly, the medical tenant is willing to pay $2 more per square foot than I could receive from any retail tenant.”  Chastened, I simply thanked him for his cogent response.

In today’s market, as we have more and more empty retail space, doesn’t this analysis have real meaning? We have long thought that eye doctors and dentists are good neighborhood tenants so why aren’t other non-invasive, non-emergency-type tenants being similarly considered? Facilities such as chiropractors, rehabilitation facilities, dialysis centers and other similar disciplines should cause little problem for the prudent shopping center owner.

In connection with these possibilities, a number of issues need to be thoroughly addressed, such as:

The tenant. The landlord needs to be sure that it has financials for the tenant and, in particular, that it has a good guaranty[s]. Unlike retail, getting a personal guaranty is not an unexpected occurrence and the landlord must be sure that it has a responsible party, or perhaps many parties. After all, when lawyers enter leases it is not unusual for the partners to agree to jointly and severally guaranty at least a portion of the lease obligation.

Construction. Unlike the standard retailer, the construction for the medical user space can be expensive with many interior walls, significant cabinetry, heavy equipment, complicated heating and air conditioning systems, and major wiring and plumbing. This needs to be carefully analyzed and the construction timing needs to be evaluated. Further, it is very important that contractors be properly experienced and licensed, perhaps even bondable.

Co-tenancy. When adding medical uses to the shopping center, the landlord needs to be sure that any co-tenancy includes these tenants either by deleting references to “retail” or by noting that medical and office users are specifically within the definition of retail. It is very important to survey previously negotiated leases.

Hours of operation. The landlord needs to be sure that this is properly drafted in the text as the hours will likely be different than the normal retail tenant. So too, landlord needs to be sure that is does not run afoul of provisions in other leases which tie hours of operation to some percentage of tenants being open.

Parking. Always a concern, this is particularly an issue for medical tenants who need parking which is proximate, might require reserved parking and likely will be pleased with handicapped spaces in front of its premises. While this might be well regarded by tenants generally, landlord needs to be sure that it has the right, by its Restricted Easement Agreement [“REA”] or by agreements with individual tenants, to change the parking field to accommodate these needs.

Use. The landlord needs to be very careful in the use clause. All medical uses are not the same, do not burden the property similarly and are not equally appropriate to a retail setting. If there is a proposed change of use, the landlord should seriously consider reserving the right to recapture the premises at its sole election. Drafting a carefully crafted use clause is important and a permitted use “for medical office” would not normally be specific enough.

Hazardous Materials. Doctors’ offices, by their nature, generate medical waste, and it is crucial that landlord and tenant fully negotiate the handling of medical wastes which might need to be disposed from the premises.

These concerns, of course, are prevalent in multi-floor retail projects and, in particular, projects which are proximate to hospitals. In the next few years, we will need to find new tenants to populate vacant spaces. Some will be retail, other will be restaurants. Perhaps some will be used for churches and schools. These leases will feel familiar, however distinctive they may be to the project. The medical use, alternatively, while it may provide financial security and rewards to the landlord, poses distinct complications which must be thoughtfully evaluated to assure the success of the project.

Abe Schear is a partner and co-chair in the real estate group at Atlanta-based law firm Arnall Golden Gregory. He can be reached via email at abe.schear@agg.com.

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