How do YOU determine the value of a negotiated exception to a lease?

Any change made to a lease has a value to one of the parties. Some have very straightforward calculable values – reducing minimum rent from $25/sf to $24/sf or changing the percentage rent rate from 6% to 5%. Others have an absolute calculable value, but take a little effort to determine that value – changing the definition of an excluded major from 25,000 sf to 50,000 sf reduces taxes from $x.xx/sf to $y.yy/sf. However, others can have a material impact on the cash flow and value of a lease or a property, but the values are difficult to determine – giving up an exclusive, cotenancy or termination right.
ICSC is applying a “flipped classroom” concept to the upcoming John T. Riordan School for Professional Development in Minneapolis. The flipped classroom is where you do exercises in advance of the class to make the classroom experience even more valuable. As part of the Economics of the Deal class, students will look at five changes made to the lease for the most recent deal they have completed and attempt to assign a value to those changes. When we discussed this in my office last week, I couldn’t get my co-workers to stop talking about it.
So – just some food for thought for you –
When a tenant requests a change to the lease, what steps do you go through to determine the value impact of that change?

The economics of a lease

Over the next week, I will be putting together a new class for ICSC’s John T Riordan School for Professional Development. The class will be offered as an elective for the Management, Marketing and Leasing tracks at the school which is being held September 23-27, 2018 in Minneapolis.

A previous version of the class focused primarily on discounted cash flow from the lease which I intend to incorporate into the class. However, I plan to also address:

  • The relationship of one lease and its impact on the balance of the property (and possibly the portfolio)
  • Premise by premise considerations for lease rates
  • Category by category considerations for lease rates
  • Building tenant improvement costs/allowances into the lease
  • How to protect yourself when you do give a sizable allowance (Security Deposits/Letters of Credit/Radius Restrictions)
  • Cotenancies
  • Termination rights (landlord and tenant)
  • Gross leases vs triple net vs modified gross leases
  • The cost of giving up certain standard lease clauses

If you have read this far, perhaps you were thinking another topic or two would be addressed in the class. Well, now is your chance to help shape the curriculum.

Please comment with any additional items you think you be valuable for inclusion.

Here is the link to the John T. Riordan School for Retail Real Estate Professionals. The School offers tracks for Leasing, Management, Marketing and Development, Design and Construction, as well as a new Leadership Institute.

Hope to see you there!

CAM, tax and insurance reconciliations during due diligence


More often than not, when acquiring a property or portfolio, prospective purchasers are focused on future cash flows. When it comes to CAM, taxes and insurance, it is future reconciliations that will have the most impact on the buyer’s cash flow.

However, when acquiring a property, it is critical to get as many years of CAM, tax and insurance reconciliations from the seller as possible. While a purchase and sales agreement may put the burden for retroactive adjustments on the seller, a tenant doesn’t care where the credits are coming from – seller or buyer.

But, often, there is another need for these historical reconciliations. If a tenant has a cap on any charge, a buyer may need to substantiate prior billings in order to justify current caps – especially in the case of a non-cumulative cap where you may need to show actual charges on a year to year basis.

Just this week, we had a tenant in a center that our client had acquired two years ago. CAM charges were fixed for this particular tenant. However, every five years, the fixed charge was to have been reset based upon the actual CAM charges for the prior five years.

Without the historical billing files, there would be no way to reset the tenant’s charge, leaving significant amounts of cash flow on the table.

So, whenever possible, even though you may do nothing with it, get as many years of historical reconciliations as possible!