News

Excluded area contributions

When a tenant pays a prorata share of taxes or CAM, there are often defined excluded areas. Most typically, those defined excluded areas are either directly assessed, self-maintaining or insured, or are paying at a rate significantly less than full prorata. By defining those areas as “excluded areas,” the landlord reduces it absorption of CAM or taxes not paid by those areas. And, again, most typically, the contributions made by those defined excluded areas are deducted from the total allocable expenses prior to calculating the specific tenant’s share of CAM or taxes.

Most typically.

However, there are instances where a lease will read “without deducting contributions from excluded areas” (this is most often seen in the northeast part of the country and Florida). This specific language allows the rare “double dip” by the landlord. It happens infrequently but it does happen.

Occasionally, we’ll see the opposite. Where the previous example includes very specific language that does state “without deducting,” the opposite is often an error. A lease will read something to the effect of “after deducting contributions from Majors,” but the lease does not allow the same Majors’ square footage to de excluded from the denominator. This gives opportunity for the rare “double dip” by the tenant.

One not uncommon issue is where a lease requires Majors or some other defined excluded excluded area to be excluded from the denominator, but subject to a cap on how much square footage may be deducted, or to some certain number of tenants that may be considered excluded areas. For example, a lease may read that “the denominator used to allocate CAM shall be the Gross Leasable Area of the center excluding any tenant greater than 15,000 sf. However, in no event shall the denominator ever be less than 200,000 sf.” In this scenario, if the denominator would have been 175,000 sf after deducting all excluded areas, the landlord would still be required to use 200,000 sf as the denominator. But often, the landlord would have deducted the contributions from all tenants that would have otherwise taken then down to 175,000 sf. In that particular (again, not so uncommon) instance, the landlord would have “overdeducted” contributions.

Our very insightful client recognized that, if not considered, the balance of the tenants would be getting a contribution from an anchor for taxes that they, themselves, were not required to pay.

Why this issue this week? We worked on a property this week where a portion of the property was subject to a material tax abatement. Two of the anchor tenants were required to pay taxes based upon what they would have been absent 50% or 75% of the abatement. So, in this instance, the two tenants were paying on taxes greater than total taxes billed. However, the balance of the tenants did not have the same requirement and were being billed based upon actual taxes. Our very insightful client recognized that, if not considered, the balance of the tenants would be getting a contribution from an anchor for taxes that they, themselves, were not required to pay.

While excluded area contributions are usually straightforward, this is clear evidence that they are not always so!

Real estate tax resources

brick

Back when I first got into the industry in the late 1980s, if I needed information on a property’s real estate taxes, it was not unusual to actually have to go to physically go to a county assessor’s office and access the data on microfiche. Fortunately, those days are long gone. For the most part, municipalities’ tax records can be accessed online.

A friend was looking for information this week related to some of their properties’ land vs improvement value and was lamenting the lack of data on certain municipalities’ websites. As it has been a few years since I could not get everything I needed (tax related) for a property remotely, I was surprised. But, he was not checking all of the available resources.

When I shared my methodology, he, too, was able to get everything he needed. First, determine the county. Then search three terms – 1. (county) tax assessor, 2. (county) tax collector, and (county) GIS. Obviously, you may have to add the state as well if it is a common county name. But, seriously, one of those three sites will typically get you the information you need – even the property’s assessor cards where there are multiple cards for one tax parcel. Use that search methodology for a property you are familiar with and see just how much information is available. My first search is typically the (county) GIS search because I can find a property without even knowing the owner name, tax parcel number or even specific address – you search using a map.

The information is there. You just may need to dig a little.

Real estate tax timing issues

When reconciling operating expenses, timing is often pretty straightforward. The tenants make monthly escrow payments throughout the year. The landlord reconciles the calendar year and applies those payments. An additional billing or credit is applied to a tenant’s account.
However, taxes are a different story. While some municipalities bill taxes for calendar years, many bill for fiscal years – often a July – June period. We have worked on properties where there have been multiple types of taxes with multiple fiscal periods. County, school, village using calendar year, fiscal year 7/1-6/30 and fiscal year using 5/1-4/30. As you can imagine, that can really complicate a reconciliation. There are endless numbers of ways to deal with this type of scenario with the most common being to blend to a calendar year. Essentially, you calculate what taxes would be for say 2018 – 6 months of one fiscal year, 6 months of another – using escrows and occupancy for that same calendar year. Consistently applied, this methodology can work really well.
However, there are certain states and municipalities that really throw a wrench into the calculations – where taxes are sometimes billed either a full year in advance or a full year in arrears. In 2018, in some areas, the tax bill being paid could be for 2019, while in other areas, the tax bill could be for 2017!
What does that mean? If a tenant’s lease commenced on April 1, 2018 in an area where taxes are paid a full year in advance, the taxes for 2018 would have been paid in 2017. Therefore, on the day the lease commences, the tenant should be billed for essentially a full year of taxes – the eight month remaining in 2018 and the first four months of 2019 – and then immediately start making additional escrow payments. When their lease terminates, they would essentially be entitled to a full year’s escrow refunds.
If a tenant’s lease commenced on April 1, 2018 in an area where taxes are paid a full year in arrears, the taxes being paid in 2018 are really for 2017, so there would be no tax obligation for that first partial year. When the lease terminated, they would still owe a year plus of taxes.
To combat this timing complexity, many sophisticated landlords will change the lease language to specifically address timing to something along the lines of “taxes for the year will be taxes paid during the year without regard to the period to which they apply.” With that language, for that lease that started on April 1, 2018, regardless of whether it was in a pay for the prior year, pay for the current year or pay for the next year municipality, the tenant would pay its share of taxes paid during that particular year – using the occupancy information and escrows for that year.
The bottom line on this whole timing issue is absolute consistency – in both understanding the periods being billed and how the escrows are being applied – and sticking with that methodology.
Why this issue this week? We are working on a property where taxes are paid a full year in arrears – so the taxes paid in 2018 are for 2017. But there is a lack of consistency. Some of the anchors are billed taxes based upon the period to which they apply while others are billed taxes using amounts paid during the year, while the inlines and outparcels have similar issues. Some escrow, some don’t. And there are material changes in GLA and occupancy among the years. It’s pandemonium!
Do yourself a favor. Shoot for consistency! (And, spend some time really understanding tax periods and how a seller has applied escrows when you are considering a property for acquisition!)

Buen Fin!

This week, the blog will not be about lease administration. Rather, it is just a few pictures to give you confidence going in to the upcoming holiday retail season.

My wife and I are visiting our son in Puebla, Mexico this week. We happened to arrive during Buen Fin – the Mexican version of Black Friday. Traffic around the city is ridiculous and is attributed to Buen Fin. And, traffic in the malls, shopping center and streets is absolutely unbelievable. While there is nothing scientific about it, I am still a fan of “bag checks.” No. Not the bag checks going in to a concert or sporting event, but the visual bag check of whether or not people were buying. And, yes! They were buying.

For me, these pictures are better than any motivational posters.

(Just a couple of quick observations. If you look at the pictures, you will see that the anchors do not have grand courts. They are flush with the rest of the inlines, and they may online have a 50-60’ front lease line. Instead of having wall kiosks, flush with the front of the anchors, you then have a series of smaller premises (maybe 750-1,000 sf), making it much busier (in a good way) than our US anchor courts. Also, with Puebla being in a much more temperate climate, they had a good portion of the mall covered, but open air (you should see it in some of the pictures), eliminating the expense of mall HVAC in the part of the mall. And, finally, I have never see a food court busier. In the picture, you will notice shoppers sitting and finding space wherever they could, often on the floors and half walls. My son said that the quality of the local food court tenants is exceptional.)

Prior defaults

This past week, we worked on a 40 tenant open air center acquisition. Often times, a seller severely restricts the information provided to our clients, the buyers. Fortunately, this time, we had almost free access to the seller’s files.

Many of the leases were leases that had been amended and extended 3,4,5 times since their original commencements – some from the 80s and 90s. And, many of the tenants had been defaulted numerous times. The defaults in the files only related to the current seller’s period of ownership – from about 2012. But, these defaults (most were cured) are pertinent to the buyer’s acquisition of the property.

Why? For one, it lets you know what to expect for your period of ownership. If the aged receivables shows a tenant is current, it may not tell the whole story. In many cases, a pattern of defaults lets you know, in advance, that management will have to stay on top of a tenant to keep them current. Rather than being into ownership four months frustrated with a tenant that is now four months behind, knowing in advance that a default on the 15th of every month will keep them current will ultimately make for a much better landlord-tenant relationship.

But, there are other option, restriction and covenant related reasons to be aware of prior defaults. Many leases will have language that specifically eliminates certain clauses in the case of some number of defaults. For example – renewal options. The language might read something to the effect of “Provided the tenant has not been in default more than three times during the term…” In some cases, a tenant will add “… beyond any applicable cure period …”

Options and exclusives are the two more common areas to see this contingent default language. Think about what that could potentially do for you in the case of a tenant with below market options! Think about what that would do in the case of an underperforming tenant with an exclusive. It gives you options!

We have often addressed that once a lease is executed, you HAVE to live with the terms of the lease. However, in some cases we can actually view it as you GET to live with the terms of the lease.

If you search, there may be a silver lining!

1 4 5 6 7 8 19