February 25, 2018
One of our earliest blogs was about the landlord’s standard lease being the best case scenario. Changes that are made to that standard lease are being done at the tenant’s request because the tenants have seen, over and over, how not changing those clauses has impacted their financials. Tenants are dealing with tens or hundreds of different landlords’ standard lease forms. They can see the differences.
But, unless you are a prolific big box developer with the same cadre of tenants at each property, the landlord does not have the opportunity to see the nuances in a tenant “standard” lease form. It is “standard” to the tenant, but not so much to the landlord.
This week, we were working on a regional mall in Florida where a big box tenant had taken an anchor position in a former department store space.
How many flags went off in your head reading that sentence? There should be quite a few.
Regional mall – While regional malls have historically had junior anchors, with some exceptions, even junior anchors in regional malls have been on landlords’ standard form leases. Department stores have almost always used their own leases or other types of documents, but landlords have been able to rest a bit using their own standard leases. We’ll see many changes to that over the next few years in this evolution of shopping centers. Big boxes used to using their own leases in power centers will expect the same in regional malls.
Former department store – If you are even marginally aware of cotenancy language in leases, you should be wondering about whether replacing a traditional department store with some other sort of big box will satisfy “acceptable replacement” language for tenants with cotenancy clauses in their leases. If you replace a tenant like a Penney or Sears with a theater, a sports big box, a soft goods retailer, a gym – will that be deemed an acceptable replacement?
Florida – There are a couple of things I think of when I think Florida retail leases – hurricane language (Can we include hurricane clean up in CAM? Is there a limit on levels of insurance a landlord can bill to a tenant? Does the lease require business interruption insurance?) and sales tax (most lease related occupancy charges in Florida require a tenant to pay sales tax). The other thing I think of related to Florida leases, but primarily for open air centers, is that landlords of Florida properties are much likely to give up percentage rent than in any other state. In fact, smaller landlords with properties primarily in Florida may even have standard leases without percentage rent requirements.
Typically, if a property is in Florida, there will be a clause somewhere in the lease that addresses the tenant’s obligation to pay sales taxes on rent. Usually, the sales tax will be collected by the landlord. But, if a tenant has a large enough presence in the state, there may be a clause allowing the tenant to pay sales taxes directly to the state – not often, but it happens – and that language will also be addressed somewhere in the lease.
Did you ever pay attention to a clause in your lease that might reference “Headings and Captions”?
It is essentially a “don’t come crying to us if you didn’t pay attention to something because the caption made you think you didn’t have to read it” clause. It’s there because both landlords and tenants get burned when a clause is buried where you do not expect it.
Finally, back to just how good that tenant attorney was. When you read the definition of Real Estate Taxes in the lease, it will typically define that taxes include all taxes, general and special assessments, perhaps personal property taxes on the common area and whether consulting and challenge fees may be included, among others. It will also address what is not included – typically things like franchise, estate and income taxes. It may specifically exclude special assessments. A tenant may have negotiated that they do not have to pay increases in taxes due to a sale of the center (often more than one time every x years). But, in both the definition of inclusions in, and the definition of exclusions from, the definitions almost always are limited to real estate taxes.
Almost always! For this particular lease, the tenant attorney buried in the tenant’s own standard lease form, in the definition of real estate taxes (specifically in exclusions from real estate taxes) a line that the tenant did not have to pay sales taxes on minimum rent. Sales taxes on minimum rent! That has nothing to do with real estate taxes. Those “headings and captions” were not accurate. And, it was not that the tenant would pay sales taxes directly to the state. No – the tenant did not have to pay sales taxes AT ALL. Sales taxes have to be paid. The state doesn’t care whose responsibility it is. Sales taxes have to be paid. If the tenant doesn’t pay, who does? The landlord!
Bottom line? The tenant’s minimum rent was just over $1.5m per year. The landlord was forced to use this as the gross collection, meaning total of minimum rent and sales taxes together. So you take the $1.5m and divide is by (in this case) 1.075 – that’s 100% plus the 7.5% sales tax. That means $1.395m in minimum rent and $105k in sales taxes.
Buried language and a brilliant tenant attorney once again costing the landlord.
Depending upon the cap rate of the center, that simple little bit of buried language cost the landlord somewhere between $1.4m and $1.8m in value.