January 27, 2019
Last week we addressed a few of the issues to consider related to excluded area contributions, but two properties that we worked on this week made me realize I missed discussing two very significant issues – refunds/credits and recaptures as they relate to excluded area tenants.
At one of the properties, an excluded area tenant audited its CAM and tax charges for several years. While the landlord had tried to bill everything in accordance with the terms of the leases, the tenant was entitled to credits of just over $75,000. While painful to issue such a significant credit, since the credit was issued to an excluded area tenant, this actually should have triggered other adjustments. Every tenant in the center with a lease that defined that particular tenant as an excluded area had previously had its CAM and taxes calculated based upon the original contributions. As the credits were issued reducing those contributions, the other tenants were underbilled.
Often, it is impractical to go back to bill the other tenants for their respective share of what may have been $25,000 per year for three years. The typical application of this would be to apply the credit in the ensuing year, without applying the same credit to those tenants who were not there in the years the credits applied.
(This is a bit more advanced, so skip it if you need to. The method just addressed may have a negative impact if some of the tenants have caps that would be affected by a material reduction in any given year. In that case, even though it would be an administrative burden, it would be best to go year by year so as not to set the caps artificially low for any given year.)
The second property had a standard lease for that specifically addressed deducting contributions from majors (definition varied tenant to tenant) where the major did not have the right to “recapture” the contribution against other charges. I will do a blog in the future to specifically address recaptures. But briefly, some tenants (typically majors or the most desired tenants) have requirements to pay a share of CAM or taxes, but then have a right to offset these payments against percentage rent or some other charge. As an example, if a tenant was required to pay $100,000 in taxes, but had $65,000 in percentage rent due, and then tenant was allowed to offset taxes paid against percentage rent, then, with this clause in a lease, instead of a $100,000 contribution from the excluded area tenant reducing allocable taxes, the contribution used would be $35,000 ($100,000 paid less $65,000 “recaptured”).
We usually see tenants granted recapture language perhaps one time out of every three to four retail properties (so maybe .5-1% of leases). In this case, while the standard lease does address recapture language, none of the current majors have recapture rights (we haven’t completed the outparcels which could potentially have recapture rights). Therefore, at this property, it may not even apply.
These two issues are a little more convoluted. Feel free to comment if you have any specific issues needing clarification.