What is a co-tenancy clause and why does it matter in due diligence?

A co-tenancy clause lets inline tenants pay reduced rent or terminate if an anchor tenant vacates or its sales fall below a stated threshold. Diligence has to map every co-tenancy clause to its trigger tenant and quantify the aggregate base rent at risk, this is retail's largest contingent liability and it's invisible in a standard rent roll.

How do you audit CAM reconciliation in retail due diligence?

Pull three years of actual recoverable operating expenses from the operating statements and compare to what tenants were actually billed. Recovery rates consistently below 90-95% usually trace to admin-fee caps, exclusions for capital items, or gross-up errors in the lease language; verify each lease's CAM exhibit against the reconciliation, not just the total.

How is percentage rent calculated and how do you verify it?

Percentage rent is typically a percentage of sales above a breakpoint, either a stated breakpoint or a 'natural' breakpoint calculated as annual base rent divided by the percentage rate. Pull the tenant's actual sales reports and recompute the breakpoint; landlords frequently under-bill percentage rent when sales cross the threshold mid-year and reporting lags.

How long does real estate due diligence take?

30–60 days is typical for institutional commercial assets. Multi-property portfolios run longer.

Who performs real estate due diligence?

Typically the acquisitions team quarterbacks, with specialists pulled in for environmental, title, zoning, and legal review.

Retail · Due Diligence Checklist

Retail Due Diligence Checklist

Retail due diligence checklist for institutional acquisitions: CAM reconciliation, percentage rent breakpoints, co-tenancy risk audits. Free template.

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Why the due diligence checklist looks different for retail

Retail leases layer CAM reconciliation, percentage rent breakpoints, and co-tenancy triggers on top of base rent, none of which exist in single-net asset classes. A diligence process built for office or industrial misses all three because it only checks the base rent line and never touches the reconciliation math or the sales-reporting obligations buried in exhibit language.

Anchor tenants carry outsized power over inline economics through co-tenancy clauses. A single anchor closure or sales decline below a sales-per-square-foot trigger can legally cut rent for a dozen inline tenants simultaneously. Diligence has to model anchor health and lease covenants as a single system rather than tenant-by-tenant, because the exposure is concentrated and contractual.

Retail is one of the only asset classes where tenants report their own sales figures, and those numbers directly drive percentage rent and occupancy cost ratio, the tenant's operating health metric landlords use to price renewal risk. Diligence must audit sales reports against actual percentage rent billed, because unbilled overage rent here goes undetected for years.

The retail-specific checklist

1

Confirm title is clean

Verify: title commitment, policy exceptions, recorded liens
2

Reconcile rent roll to executed leases

Verify: rent, expiration, deposit, and options match each lease 1:1
3

Tie rent roll to T-12 general ledger

Verify: three months of GL tie to within 1% of rent roll totals
4

Review property condition assessment (PCA)

Verify: deferred maintenance budgeted and reflected in the pro forma
5

Review Phase I environmental report

Verify: no REC, no HREC, no CREC without remediation plan
6

Review zoning and entitlements

Verify: current use is a permitted use; no pending rezoning
7

Confirm tax status

Verify: tax bills paid current, no special assessments pending
8

Audit operating expenses

Verify: three-year trend; flag any single-line change >10% YoY
9

Reconcile CAM billings to actual recoverable expenses for the trailing 3 years

Verify: recovery rate by category; flag any year where the landlord under-recovered by more than 5% of actual capped CAM
10

Pull anchor and major-tenant sales reports for the trailing 24 months

Verify: sales-per-SF trend against the co-tenancy and percentage-rent breakpoint thresholds stated in each lease
11

Map every co-tenancy clause to its trigger tenant

Verify: which inline tenants have rent-reduction or termination rights tied to which anchor, and the aggregate base rent exposed if that anchor vacates
12

Verify percentage rent billed against natural and stated breakpoints

Verify: recalculate breakpoint sales (annual base rent / rent rate) and compare to lease-stated breakpoint; flag any variance over 5%
13

Confirm exclusive-use and radius-restriction clauses across the rent roll

Verify: no two tenants hold conflicting exclusives that could trigger co-tenancy or termination disputes post-close
14

Audit TI allowances committed for vacant or soon-to-expire inline space

Verify: unspent TI/LC reserve against market backfill cost, typically $35-$65/SF for second-generation inline space

Metrics that matter for retail

Metric	Target	Calculation
CAM recovery ratio	>95%	CAM billed to tenants / actual recoverable CAM expense
Occupancy cost ratio	<12% for anchors, <15% for inline	(base rent + CAM + percentage rent) / tenant reported sales
Co-tenancy exposure	<20% of base rent	aggregate base rent of tenants with active co-tenancy clauses / total base rent
Occupancy cost ratio	8–12% for anchors, 10–15% for in-line	total occupancy cost / tenant sales
Sales PSF	varies by category	reported tenant sales / leased SF
Recovery ratio	>90%	recovered expenses / recoverable expenses

Red flags unique to retail

Anchor sales trending toward the co-tenancy trigger threshold

a single quarter below the sales-per-SF trigger can activate rent reductions for every inline tenant with a co-tenancy clause, cutting NOI before the buyer can respond
CAM recovery consistently below 90% of actual expense

an admin-fee cap or exclusion clause is silently absorbing costs the landlord assumed were fully reimbursable, understating true operating expense burden
Occupancy cost ratio above 15% for in-line, non-anchor tenants

tenants paying that much of their sales in rent are flight risks at renewal, the pro forma's rent growth assumption won't hold
Co-tenancy trigger above 70% occupancy

common anchor departure clause that can cascade into reduced rent across the center
CAM cap below 3% annual

suppresses expense recovery and flows inflation directly to NOI
Exclusive-use clauses blocking lease-up

limits the pool of replacement tenants even before the space goes vacant
Radius restrictions under 3 miles

constrains the operator's ability to relocate or expand nearby

Example — retail due diligence checklist walkthrough

Take a 148,000-square-foot grocery-anchored retail center outside Houston: $30.5M, about $206 per square foot on a 6.3% in-place cap rate against $1.92M of T-12 NOI. The anchor is a 46,000-square-foot regional grocer on a 15-year lease with 7 years remaining; 13 inline tenants fill the remaining 102,000 square feet. The broker's pro forma shows full CAM recovery and stable percentage rent from three inline tenants that report sales.

The CAM reconciliation comes first. Actual recoverable operating expenses for the trailing three years, pulled from the operating statements, run $612,000, $634,000, and $661,000. Tenant billings for the same years total $560,000, $571,000, and $588,000, an average recovery rate of 89%. The gap traces to an admin-fee cap in six inline leases that limits the landlord's 15% markup to 10%, and a capital-repair exclusion the property manager had been billing anyway. Net effect: roughly $73,000 of annual CAM the landlord is absorbing that the pro forma assumed was fully recovered. Both drivers, the admin-fee cap and the capital-repair exclusion, sit in lease exhibit language rather than in the operating statements.

The co-tenancy language holds the bigger finding. Eight of the 13 inline leases, representing 41,000 square feet and $1.02M of annual base rent, carry co-tenancy clauses tied to the grocery anchor's continuous operation and a sales threshold of $380 per square foot. The anchor's percentage-rent sales reports show sales of $402/SF two years ago, $391/SF last year, and $374/SF on a trailing-12-month basis, now below the trigger. If the anchor reports another quarter under threshold, those eight tenants gain the right to pay 50% of base rent until a replacement anchor opens, a potential $510,000 annual rent reduction.

Neither the CAM shortfall nor the co-tenancy exposure changes trailing NOI today. What they change is the risk: this asset needs a reserve for the CAM gap and a contingency for the co-tenancy trigger rather than the fully-recovered, fully-priced anchor lease the offering memorandum implied. On this deal, that translated into a $1.1M reduction in the purchase price.