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Looking to the future – dealing with lease related issues

March 30, 2020

Hopefully, in the next few weeks, we will be slowly but steadily getting back to a new normal. We will all be faced with the question of minimum rents during this period from both the landlord and tenant perspective. But there will be other issues we will all have to consider as we come out of this. We addressed breakpoints in a blog last week – “and the breakpoint shall be likewise abated.”

However, there are many other issues we may have to consider. What will the occupancy period be when allocating expenses for the year? Will it remain 366 days, or will we drop it by the number of days we were forced to shut down? What if we were not forced to shut down, but did? What if most of the center shut down, but a few tenants (supermarkets, home improvements, discount superstores) remained open? Do those expenses get allocated across the entire GLA of the center using 366? Do we treat them almost as after hour expenses and allocate them among the tenants that remained open and then use the net occupancy period? What if theaters’ and restaurants’ maximum occupancy loads are reduced to allow for continued social distancing? Do we consider the flat reduction %, or can we consider what the restaurants’ and theaters’ occupancy load was pre-shut down and come off by that much lesser percentage? There are so many more that will come up over the next 12 months as we reconcile all of our leases for 2020. It is better to consider some of these issues now as we start to go through the rent relief exercise so that we do not have to deal with open issues again next year.

Personally, I think we should be fairly optimistic about commercial real estate. The whole country – no, really world – is recognizing that being out and about in a shopping center, mall, office, mixed use property, house of worship, park, greenspace and in any other type of social gathering is preferable to isolation. There will be some continued pain after the fact as we deal with these post-grand re-opening issues. But compared to the pain of isolation and non-operation, that’s a “good” pain.

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“… and the breakpoint shall be likewise abated…” – a thought about rent relief

March 26, 2020

We have seen the articles today, “Cheesecake Factory and Primark refuse to pay April rent.” Some of this is the media looking for clicks. The landlord-tenant relationship has always, out of necessity, been a symbiotic one. The economic environment at any given time may shift the “advantage” back and forth, but it really does go back and forth. I have found that the best landlords and the best tenants are in it for the long run – not a quick score and then run. (Not saying there are some of those out there.)

Landlords understand what tenants are going through right now. For the most part, they truly would like to help the tenants and, for the long term benefit of both, would do what they can. Hard as it may seem for some tenants to believe (and even more so for the media), some landlords are actively, proactively, considering rent relief. But, like many tenants, some landlords are hamstrung – they have lenders and loan covenants that prevent them from voluntarily making changes.

We have had the tremendous opportunity to work with many of the leading commercial landlords throughout the US (and in other parts of the world – on day-to-day operations, on acquisitions, on long term asset management plans; with administrators, accountants, leasing, development, marketing, management and C-suite. The overwhelming majority of people that we have worked with are great people out to do what is best for the tenants and landlords alike. It’s not a win for the landlord or a win for the tenant. It really has to be win-win.

“…If minimum rent is abated, the breakpoint shall likewise be abated…”

With that in mind, I wanted to remind landlords and tenants alike about a clause in the majority of leases where there is a percentage rent requirement that may help with rent relief considerations. It typically reads, “…If minimum rent is abated, the breakpoint shall likewise be abated…”

A quick synopsis of this language means that if the landlord and tenant agree to a reduced rent, the percentage rent breakpoint is reduced proportionately. If a tenant’s rent is $60,000 per year and they are required to pay 6% of sales over $1,000,000, and landlord and tenant agree to reduce the rent to $45,000 per year, the tenant would then be required to pay 6% of sales over $750,000. If the tenant does better, the landlord picks up some of that lost rent.

That really only helps in a small percentage of leases – ones where the tenant is either in or near percentage rent. If the tenant has no percentage rent requirement or if the tenant was only doing $500,000 in sales for the prior 12 months, reducing the breakpoint to $750,000 is not going to allow the landlord to pick anything up. But if they were on track to exceed $1m pre-coronavirus, the reduction in rent and the reduction in breakpoint could help.  (And, the landlord would still have to deal with restrictions related to its loans.) But it is a possibility.

Ultimately, whether it is a national, regional or local, mom and pop, there is not a landlord out there that does not realize it is in the best interest of all parties for the tenants to survive. This is not a matter of one or the other “winning.” Both parties must win for the others to win as well.

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Two encouraging lessons for commercial real estate from coronavirus

March 24, 2020

It has been rough for all of us to watch and experience what has been going on in retail over the past few weeks. I was encouraged last week when an International Council of Shopping Center’s friend from Shanghai relayed that retail was picking back up in his city. But, locally – nationally – here, the wait and see hasn’t been easy.

But, there are two really positives coming out of these shutdowns – one objective and one subjective.

Objectively, we have learned the term we have been using in the industry for the past 12-24 months – phantom restaurants – can absolutely work for the future. Absolute proof that a restaurant can succeed without a dine-in presence.  So, those otherwise undesirable, non-fronting or limited-frontage spaces have yet another potential, successful use.

avdining

Subjectively, this pandemic proves that we are all ultimately social creatures. We need interaction with one another. My family and friends will tell you that one of my favorite personal sayings is (jokingly) “I hate people” – only because I am very much an introvert. But, the truth is, (and I am hearing Lyle Lovett’s “I love everybody” as I get ready to type this), I really do truly like almost all people. Even as an introvert, I need social interaction.

So, while we can order so much online, we still need to see and be around people. We need the head nod passing another shopper in the store. We actually need crowds.

And, while every family member and friend I know might complain about the difficulty of finding parking at Avalon, our beautiful, successful mixed use destination in Alpharetta, any one of them would prefer buying their favorite leggings or yoga pants in person at Lululemon than online. They need that social interaction.

We’ll be back after this pause.

I can’t wait to not be able to find a parking spot at Avalon!

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“We see the retail business is getting busy again”

March 19, 2020

Not my typical lease administration post. Just sharing an email that I received this morning.

Personally, when I have to do something I don’t want to. I tell myself, “There is nothing I can’t do for X amount of time.” X amount of time has always been a wide variable – in some cases, it could be seconds, minutes or hours while in others, it has been days, weeks or months. I tell myself I can get through it because there is an end in sight.

Like so many of us, my own level of anxiety has been driven quite a bit higher over the last couple of weeks. I realized when I received an email this morning, it was because I couldn’t see an end.

I have stayed in touch with some of the wonderful people I met in Shanghai while teaching classes for ICSC. Selfishly, I hadn’t thought to reach out while they were in the early stages of it. But I did this week and this is the response I received this morning:

jeff

Hi Jack

Great to hear from you again!

Both Catherine and I are doing very well. Thanks for greating. Yes, the virus outbreak almost comes to its end in China but we are still very alert and get fully ready for any possible comingback. Most of people here are still wearing masks.

But the city is regaining its momentemum right now and we see the retail business is getting busy again and actually I miss the days of empty roads and malls. The lockdown or social distancing is safe for everyone while the number of infected cases goes up like crazy. You don’t have to feel horrified if you do what you are told to do by the real experts there, like washing hands.

Jack, do stay well and healthy. Hope the pandemic becomes history soon and looking forward to meeting you in Shanghai again.

All the best.

This simple email has shown me there is an end. While I may not know what the X amount of time is in this case, there is some X. I can get through this. WE can get through this.

Remember at the end of It’s a Wonderful Life, when George comes bursting through doors and runs through the house like a mad man. At that moment, he truly appreciates the finial on the stairs that he had never fixed and had been a troublesome thorn in his side.

Its

While we may not know exactly when, that email from Jeff in Shanghai has given me both hope and a new found appreciation for my broken finials.

 

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Applying the K.I.S.S. method in leases

October 27, 2019

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“Keep it simple, stupid!” That hits home so often as I am reading leases.

I have taught classes for ICSC for nearly 25 years. One of my favorite example has been base rents or fixed CAM charges increased by the CPI. That in and of itself is pretty simple. But, you often see caps on these increases, and in many cases where there are caps there are also floors. So the lease might read something to the effect of:

Minimum rent as reflected in Section x.x will be adjusted at the beginning of each Lease Year by the increase in the Consumer Price Index (CPI) from Index published as of the Commencement Date through the Index in effect as of the adjustment date. The increase applied shall never be less than 2% nor more than 4%. The Index shall be the CPI, Clerical Workers and Wage Earners, 1982-84=100 for the SMSA of which the property is apart.

This adjustment is not difficult to calculate, but it has so many different factors to consider.

  • What is the Commencement Date? You might hone in on the Rent Commencement Date, but the Commencement Date might defined elsewhere as the Date of the Lease.
  • What is the definition of Lease Year? Is it from the Commencement Date? Is it from the Rent Commencement Date? Is it 1/1-12/31? Is it 2/1-1/31?
  • What is my SMSA? A property is midway between Philadelphia and DC? Do I go with Philly or DC? Do I go with Eastern Region?
  • What is the “as of date”? It may sound silly, but “as of” Commencement Date is different that “for” the month of Commencement, which is different that Published “during” the month of Commencement. The possibility of three different months. And, the right index could change if the lease commenced on the 10th or 20th of the month (the Index is usually published mid-month, but it can be the 13th-17th).
  • Are my floors (minimums) or cap (maximums) cumulative or non-cumulative?

Honestly, there are a handful of additional considerations.

However, with the idea of K.I.S.S., you can ask, what are we hoping to accomplish? Your minimum is 2%. Your maximum is 4%. Do we think maybe both parties are shooting for 3%? Is it possible they both have an idea of when each year they would like the increase to be applied?

So, instead of each year having to do the drawn out computation, it can be eliminated with:

Minimum rent will be increased by 3% each January 1 of the term, with the first increase effective 1/1/20.

No arguing of any component of a computation. Simple. Straightforward.

Why this post this week?

We are working on a portfolio acquisition and the seller has created some of the most complicated pools for one of these open air centers that I have ever seen. Grocery and discount store anchored. 11 different groupings for allocations. A similar number of pools within these  groupings. Multiple denominators within each of these groupings. Caps. A Most Favored Nations clause or two.

And, there was one particular pool, with one particular denominator that had been created for one particular tenant. The total allocable expense in that pool? $158. Seriously, $158. The incremental pickup of creating the separate pool and the unique denominator? $1.30. That is not $1.30/sf. That is $1.30 total.

My life, and the lives of the professionals in our company (Meridian Realty Consultants), is about making sure that landlords do not leave any cash flow on the table. I can appreciate efforts to reduce a landlord’s absorption. But, the number of factors going in to that calculation – the expense coding, the allocation among the groupings, the denominators within the pools, the explanations necessary – all for $1.30?

I have a really bad tendency to associate scenes from movies or lyrics from songs to my current situation. As I wrote that $1.30, it brought back a scene from a movie I haven’t even thought about in probably 35 years. https://www.youtube.com/watch?v=e9mf3Bypyk8

Focus on what matters. And, K.I.S.S.

Comments | Posted in Commercial Real Estate, Malls, Office Properties, Retail Leases, Shopping Center, Uncategorized

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