Retail · Leases
Co-Tenancy Clauses: How One Vacancy Becomes Three
The anchor leaving is bad. The clause that lets four in-line tenants cut their rent because the anchor left is worse.
A co-tenancy clause lets a tenant reduce rent, or terminate, if a named anchor or a stated occupancy threshold is lost. It is a normal ask from a national in-line tenant and a genuine hazard for a landlord who has not read the whole rent roll together.
The two flavors
Named co-tenancy ties to a specific tenant, usually the anchor grocer or big box that drew traffic to the center. If that name goes dark, the clause triggers.
Occupancy co-tenancy ties to a percentage, commonly 70 or 80 percent of gross leasable area occupied. Broader, and easier to trip in a center with several small vacancies at once.
Remedies vary from a switch to percentage rent, to a fixed reduced rent, to a termination right after a cure period. The last is the one that turns a manageable problem into a repricing.
Why it compounds
Because these clauses are correlated. The anchor closes, three in-line tenants trip their co-tenancy, two go to reduced rent and one leaves, which pushes occupancy below the threshold in a fourth tenant's lease. A single vacancy becomes a cascade, and your rollover model, which treats each tenant independently, will not show it.
What to do in diligence
Abstract every lease for co-tenancy language, not just the anchors. Build a list of what triggers what, and at what occupancy level. Then ask a specific question: if the anchor goes dark tomorrow, what is my income the day after? On some centers the answer is startling.
Check the cure periods too. Most clauses give the landlord a window, often nine to twelve months, to replace the anchor before the remedy bites. That window is your real downtime constraint, and it is usually shorter than the market takes to backfill an anchor box.
Underwriting it
You cannot model a cascade with a single renewal probability. What you can do is run the center with the anchor removed and the triggered tenants at their reduced rents, and see whether the deal survives. If it does not, you are relying on the anchor renewing, which means you should be underwriting the anchor's business, not the center's.
Stress it: Strip Plaza underwriting lets you set any tenant to zero rent and see the effect on value, coverage and IRR.
Related notes
How to read this. These are working notes. Figures come from public reporting and from the models on this site, and market conditions change, check anything time-sensitive against the source before you rely on it. Nothing here is investment, tax or legal advice, and no note is a substitute for diligence on a specific property.
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