1031 Exchange for a Grocery-Anchored Shopping Center

Buyers price the grocer first, the shop-space vacancy second and the clauses that link them third

Phillips Edison's 2025 Form 10-K shows how the sector is measured: 95.0% of its rent came from grocery-anchored centers averaging about 112,000 square feet, anchor spaces were 98.7% leased against 95.1% for inline spaces under 10,000 square feet, and the average remaining lease term was 4.5 years before options. Kroger and Publix were its largest tenants at 5.2% and 4.9% of rent across 63 and 62 locations.

Short shop leases and a long grocery lease are normal, so a buyer underwrites the grocer's term and store performance, then the rollover in the shops. Regency Centers' 2025 Form 10-K explains the clauses that worry buyers: some anchors may close and keep paying rent, which prevents the landlord from re-tenanting, and co-tenancy clauses in select leases may let other tenants reduce or stop rent if a significant tenant leaves. Phillips Edison adds that exclusive-use rights can limit who may lease a vacant shop.

Read your own anchor lease for the same points before you list: remaining term and options, go-dark rights, any purchase option or right of first refusal, and whether the grocer owns its pad. Kroger's fiscal 2025 Form 10-K says roughly half its stores are in leased facilities with terms generally of 10 to 20 years, renewals at its sole discretion, and that certain leases include options to purchase the leased property.

The CAM true-up and tenant credits at closing decide how much cash reaches the intermediary

Retail leases bill common area maintenance, taxes and insurance on estimates and reconcile after year end. At a mid-year sale the buyer will want credit for any amount you over-collected and for every security deposit it takes over. Treas. Reg. section 1.1031(k)-1(g)(7) lets you receive items such as prorated rents and pay transactional items such as commissions and prorated taxes without breaking the safe harbor, but a credit that settles your own obligation to tenants reduces the cash your intermediary receives without reducing the price you must match.

Our answer on deposits, prorations and boot explains why the usual fix is to pay those amounts from your operating account at closing rather than from sale proceeds. Agree in the contract how the post-closing reconciliation is handled, and keep any holdback away from you personally: money released to you is taxable boot.

Hypothetical: a center sells for $20,000,000 with $250,000 of tenant deposits and $150,000 of over-collected CAM credited to the buyer. If those credits come out of proceeds, the intermediary receives $400,000 less than it should, and you either add that cash to the replacement or recognize gain on it. Run your own numbers with your CPA.

Large centers carry large loans, and the replacement has to carry as much debt or cash

Paying off the center's mortgage at closing is treated as money received, so to defer all gain the replacement must be worth at least the net sale price and carry at least as much new debt, or you must add cash to make up the difference. Our exchange equation guide sets out the arithmetic.

The tax you are deferring has three layers: depreciation above straight-line on any bonus-depreciated parking lot, landscaping or interior work is ordinary income under section 1250, straight-line depreciation is taxed at up to 25%, and the rest is capital gain. Publication 946 puts the buildings at 39 years and paving and other land improvements in the 15-year class 00.3, so a center that has been cost-segregated has more of the first layer than its age suggests.

One item that surprises center owners is signage. The real property regulation lists inherently permanent advertising displays as real property only when a section 1033(g)(3) election is in effect, so a pylon sign is otherwise judged on how it is affixed, whether it is designed to be removed and what removal would cost. It is a small number on a large center, but it belongs in the purchase price allocation.

Replacement options: another center, single-tenant grocery, or retail and diversified DSTs

Some owners trade into a smaller or newer center, keeping management work for a better location. Others move to a single grocery store on a long lease, a format Agree Realty's 2025 Form 10-K shows at 10.3% of its rent, with Kroger at 2.9%. Owners who want out of management often use Delaware Statutory Trusts; under Rev. Rul. 2004-86 a trustee cannot sign new leases, so multi-tenant retail in a DST usually sits under a master lease, which our master lease risk page explains.

Compare the options against our retail strip center page, which covers smaller unanchored centers, and against a traditional DST for the passive route.

Buying a grocery-anchored center as replacement property: estoppels, the anchor's options and the CAM pool before day 45

Order tenant estoppels early, starting with the grocer. The estoppel confirms rent, term, options and defaults, and the anchor's will tell you about purchase options, rights of first refusal and go-dark rights that the rent roll does not show. If the grocer owns its own pad as a shadow anchor, its departure affects your traffic without any lease you can enforce.

Rebuild the CAM pool yourself. Compare recoverable expenses with what each lease actually allows the landlord to bill, look for caps and exclusions, and check the last reconciliation for disputes. Then read every shop lease for co-tenancy and exclusives tied to the anchor.

Center diligence rarely fits in 45 days, so start before your sale closes and use Reg. section 1.1031(k)-1(c)(4) to name up to three properties, including a DST interest as a backup, with written revocation available until the period ends.