# Retail center exposed to an anchor co-tenancy clause

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Markdown: https://chicagocommercialfunding.com/deal-lab/retail-center-exposed-to-an-anchor-co-tenancy-clause/index.md
Resource ID: retail-center-exposed-to-an-anchor-co-tenancy-clause
Published: 2026-10-21
Updated: 2026-10-21
Attribution: Chicago Commercial Funding Editorial
Topic: deal-lab
Asset types: Retail
Investment stage: Underwrite
Experience level: Advanced

A hypothetical anchor departure reduces both direct rent and other tenants’ contractual payments, creating a correlated retail downside and a reserve funding test.

An anchor departure can reduce a shopping center's cash by more than the anchor's own rent. In this hypothetical acquisition, other tenants have negotiated payment remedies tied to the anchor's operation. The investor must model those contracts together and fund the period before an acceptable replacement restores income.

The thesis is a center with a supported backfill opportunity and enough capital to preserve the remaining tenant base. The proposed buyer cannot rely on a diversified tenant count while ignoring that several leases depend on the same anchor event.

All properties, tenants, leases, prices, costs, rates, and outcomes in this case are hypothetical. They are teaching assumptions, not market comparables, actual lender offers, or Jaken-funded transactions.

## Acquisition assumptions and balanced funding

| Initial use | Amount |
|---|---:|
| Purchase | $5,000,000 |
| Closing and financing costs | $150,000 |
| Physical work | $200,000 |
| Leasing capital | $300,000 |
| Opening operating liquidity | $200,000 |
| Contingency | $100,000 |
| Total uses | $5,950,000 |
| Initial selected debt | $3,000,000 |
| Required equity | $2,950,000 |

## Rebuild the contractual chain reaction

The initial $550,000 NOI includes $150,000 anchor base rent and $40,000 anchor recoveries. Assume the anchor leaves after year one. Direct lost income is $190,000, and the invented small-shop clauses permit another $100,000 of annual rent reductions during the stipulated failure. With no modeled expense savings, year-two NOI is $260,000: $550,000 less $150,000, $40,000, and $100,000.

These are hypothetical clause effects. Real leases can have different definitions, deadlines, notices, substitutes, cure periods, remedies, and continuing-operation conditions. Transaction counsel must abstract the actual provisions rather than a buyer assume that any new occupant ends every remedy.

American Assets Trust's 2025 report identifies anchor and co-tenancy exposure in its own portfolio. That is primary evidence that the risk category exists, not evidence that this fictional center has those exact clauses. [American Assets Trust 2025 report](https://www.sec.gov/Archives/edgar/data/1500217/000150021726000008/aat-20251231.htm)

The base projection assumes partial recovery to $450,000 NOI in year three, $530,000 in year four, and $550,000 in year five. The buyer must support the replacement's use, tenant viability, lease economics, and ability to satisfy the relevant conditions. Signing a lease and commencing qualifying operations are different milestones.

## Two financing structures

The selected illustration is $3,000,000 at 7.0%, with monthly payments, 25-year amortization and a five-year maturity. Monthly payment is $21,203; annual debt service is $254,441. Modeled principal after 60 payments is $2,734,865. The full commitment is assumed funded at closing; any restricted capital is tracked separately.

The alternative is $3,500,000 at 9.0% interest-only for 2 years, with $315,000 annual interest and $2,450,000 initial equity against the same uses. Principal remains $3,500,000 at its stipulated maturity without paydowns. The closing-cost allowance is held equal only to isolate structure; real proposals need their own fees, reserves, conditions, and approval.

The alternative reduces the initial common-equity check by $500,000 while creating a larger interest payment and a two-year maturity during the weak period. It should not be selected merely because it funds more of the purchase. The investor needs a separate permanent takeout that recognizes the remaining co-tenancy risk.

The selected five-year loan uses less leverage and allows the modeled recovery period. Its assumed availability is conditional on actual underwriting. A lender may impose a leasing reserve, use reduced income, or decline the structure until contractual uncertainty is resolved.

The OCC handbook provides commercial repayment and structure context. The subject lender must evaluate the actual leases and supported cash rather than rely on the seller's current NOI. [OCC CRE handbook](https://www.occ.treas.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf)

## Five-year cash and funding model

| Year | NOI | Debt service | Recurring replacements | Raw operating cash | Opening reserve used | Cash available before owner allocation |
|---|---:|---:|---:|---:|---:|---:|
| 1 | $550,000 | ($254,441) | ($20,000) | $275,559 | $0 | $275,559 |
| 2 | $260,000 | ($254,441) | ($20,000) | ($14,441) | $14,441 | $0 |
| 3 | $450,000 | ($254,441) | ($20,000) | $175,559 | $0 | $175,559 |
| 4 | $530,000 | ($254,441) | ($20,000) | $255,559 | $0 | $255,559 |
| 5 | $550,000 | ($254,441) | ($20,000) | $275,559 | $0 | $275,559 |

The $200,000 physical account funds the stipulated building work, and the $300,000 leasing account funds the base backfill program in years two and three. Both are included in acquisition uses, so the annual table does not charge them again against operating cash. Recurring replacement funding is spent in each year.

Opening operating and contingency cash covers the modeled negative year before further equity is required. Positive annual cash is assumed released for the return calculation; actual lender controls and ownership approval can retain it. A monthly schedule should identify contractor deposits, tenant allowances, free rent, and reimbursement timing. The year-end reserve balance is not a promise that every earlier invoice is funded.

## Additional operating downside

A separate stress assumes $150,000 NOI and $200,000 additional unbudgeted capital in one stressed year. Cash after selected debt, recurring replacements, and that extra capital is ($324,441). Against the full opening operating/contingency balance of $300,000, the model uses $300,000 and requires $24,441 additional equity. This is a separate stress, not a claim that the same reserve remains intact after base-case draws.

The additional stress assumes the center loses the same $190,000 direct anchor income, small-shop reductions rise to $160,000, and extra operating burdens add $50,000 relative to the original $550,000 NOI. That produces $150,000 NOI before financing. The extra $200,000 capital is beyond the original funded leasing account.

A full remaining-tenant review is essential. Some remedies might continue after partial backfill, and different leases can measure occupancy or replacement quality differently. Do not assume the landlord can cure every provision with the cheapest tenant or by subdividing the anchor. The model should follow reviewed clauses and a realistic tenant plan.

The reserve comparison uses full opening liquidity for this separate stress. If prior operating deficits or changes have consumed it, additional equity increases. Report committed capital rather than an informal belief that partners will fund an emergency.

## Concrete five-year exit and returns

Assume end-of-year-five sale with forward NOI of $550,000 and 2.0% selling costs. The scheduled-maturity model assumes no additional prepayment charge; actual payoff, taxes, and fees need confirmation.

| Exit calculation | Base cap | Higher-cap sensitivity |
|---|---:|---:|
| Exit cap | 8.0% | 9.0% |
| Gross price | $6,875,000 | $6,111,111 |
| Selling costs | $137,500 | $122,222 |
| Loan balloon | $2,734,865 | $2,734,865 |
| Net equity sale proceeds before reserve return | $4,002,635 | $3,254,024 |
| Remaining reserve returned | $285,559 | $285,559 |
| Total positive equity cash over hold | $5,270,433 | $4,521,822 |
| Total contributed equity | $2,950,000 | $2,950,000 |
| Equity multiple | 1.787× | 1.533× |
| Annual model IRR | 13.41% | 9.80% |

The exit assumes the backfill restores the stipulated forward income. The higher-cap sensitivity leaves that income unchanged, isolating pricing risk. A case with unresolved anchor vacancy should use a different income and buyer-cost analysis rather than the fully restored value automatically.

Kimco's 2025 filing offers a primary operating-property reference for retail revenue, leasing, and investment disclosures. Its portfolio data are not used as Chicago rent or cap-rate benchmarks in this case. [Kimco 2025 Form 10-K](https://www.sec.gov/Archives/edgar/data/879101/000119312526060760/kim-20251231.htm)

Return calculations include all initial equity and any modeled additional contributions. Remaining opening liquidity returns at sale only if unused. The annual cash and terminal amounts are before income taxes, investor-specific fees, and the actual distribution waterfall.

## Diligence and investment decision

Before the inspection deadline, create a tenant-by-tenant co-tenancy matrix. Record the trigger, required operating condition, alternative-performance terms, notice dates, remedy, end condition, and evidence. Link every entry to the signed lease and amendments. Review estoppels and current disputes with counsel; historic billing alone does not establish the lease's future effect.

Obtain a costed anchor delivery plan, tenant alternatives, permitted use research, parking and access review, and a leasing timeline supported by the subject space. For a Chicago-area center, identify the exact municipality rather than assume every suburban approval has the same requirements.

Set an approval condition for the maximum extra capital and a deadline for a credible replacement. If the center works only by treating other tenants as independent when their rent depends on the anchor, reduce price or decline. A stronger structure can include more equity, retained operating cash, a different purchase basis, or a documented risk allocation; it cannot invent a contractual cure.

After closing, monitor the anchor's notices, small-shop claims, occupancy definitions, leasing milestones, capital usage, lender tests, and actual collections. The important risk is correlated cash loss, so reporting should track the linked leases together rather than treat each reduced payment as an unrelated variance.


The modeled higher-cap return remains positive, but the separate operating stress exhausts opening liquidity and needs additional equity. Approval should therefore require a committed funding source for that gap and acceptable monthly timing, alongside the legal review. A favorable terminal IRR does not pay an early leasing invoice or establish that a co-tenancy remedy has ended.

## Source registry

- [American Assets Trust —2025 annual report, anchor/co-tenancy risks](https://www.sec.gov/Archives/edgar/data/1500217/000150021726000008/aat-20251231.htm): accessed 2026-10-21
- [OCC — Commercial Real Estate Lending handbook](https://www.occ.treas.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf): accessed 2026-10-21
- [Kimco Realty — 2025 Form 10-K](https://www.sec.gov/Archives/edgar/data/879101/000119312526060760/kim-20251231.htm): accessed 2026-10-21

## Related resources

- [A Chicago investor’s guide to retail property investment](https://chicagocommercialfunding.com/learn/retail/)
- [Neighborhood shopping-center acquisition with CAM leakage](https://chicagocommercialfunding.com/deal-lab/neighborhood-shopping-center-acquisition-with-cam-leakage/)
- [Commercial refinance shortfall and negotiated exit](https://chicagocommercialfunding.com/deal-lab/commercial-refinance-shortfall-and-negotiated-exit/)