Intelligent People Will Argue

I have mentioned in prior blogs that one of the things I love about lease administration is that everything you need to know about the lease is right there in 40-50 pages of the lease (sometimes as few as 2-3 pages, but sometimes as many as 500+). But, unless there are outside rules specifically addressed in the lease (such as “in accordance with Generally Accepted Accounting Principles” or “measured in accordance with BOMA standards”), the lease language is the only thing that matters (as well as laws and ordinances).

It’s beautiful. It’s all there … except when it’s not.

It can be extremely frustrating when a situation arises that was never considered by the lease. Much more often than not, stones are not left unturned. Even record stores in the 1970s or the pager stores in the 1980s and 1990s addressed “the technological evolution of their permitted uses” in both their use clauses and exclusive use clauses. But, twice this week, we had situations arise that had not been considered – or at least not addressed properly.

The first was a new lease with the tenant’s expected opening in March, 2018. The lease language addressing CAM was clear and concise. For 2018, CAM would be $x.xx per square foot, increasing by 5% each January 1. But, the lease did not consider that opening might be accelerated a few months into 2017. As the title of the blog suggests, intelligent people will argue. Since you have to live within the terms of the lease, what will the CAM charge be for 2017. Is it the $x.xx per square foot quoted for 2018? Is it $x.xx per square foot for 2018 divided by 1.05 (which would cause it to increase to $x.xx per square foot after applying a 5% increase)? Or, is it possible there is no charge for CAM for 2017 since the lease specifically addresses 2018 forward? (Ultimately, because the word “through” was buried in a CAM related section, the $x.xx per square foot rate for 2018 applied to 2017 as well.)

The second situation related to an extension of the term. A lease had naturally expired 1/31/17 and the tenant had been holding over as new terms were negotiated. Rather than execute a new lease, an amendment extending the term was executed. And, rather than making the extension retroactive to 2/1/17, a “New (uppercase “n”) Rent Commencement Date” was addressed, with a five year extension term with rents addressed by “Lease Year” (uppercase “L” and “Y”). With a new Rent Commencement Date of 8/1/17 and a new expiration date of 7/31/22, it was clear what the intent was – rent bumps each 8/1. However, the “Lease Year” definition, which was based upon the original “Rent Commencement Date,” would not have changed. And, if it did, the lease as amended never considered what would happen to the partial lease year (2/1/17-7/31/17) percentage rent that would now be occurring mid-term. Again, intelligent people will argue. (This one actually needs a letter agreement to specifically correct the Lease Year definition and the partial year percentage rent.

While it would be impossible to consider every potential scenario to be covered by a lease as new situations arise every day, the two situations will be used by the respective landlords to help their standard leases evolve. Ensuring that the “through” language is addressed in the “recitals” (terms) portion of the lease and is more prominently featured in any fixed CAM clause will take care of the early opening issue. And, while the mid-term partial lease year would likely never need to be addressed in the standard lease form, the landlord will now surely recognize the impact of a potential change in lease year definitions prospectively.

In any event, intelligent people will continue to argue.

Poof! A $40M Value Swing Because of Lease Language

In prior posts, we have addressed why there are excluded areas defined for purposes of calculating prorata shares of taxes or CAM. In a nutshell, if a part of a property is not paying a full prorata share of expenses, any shortfall has to be absorbed by the landlord. For example, we have a fully occupied 1,000,000 regional mall with $1,000,000 in taxes. If everyone paid their full prorata share, all tenants would pay $1.00/sf. However, if a 100,000 sf anchor was not required to pay taxes, the landlord would absorb $100,000. However, if we define that anchor as an excluded area, the other tenants would pay $1,000,000/900,000 sf, or $1.11/sf. Then the landlord would have no absorption – we would have collected the full $1m.

This past week, we unfortunately had to deal with a property where the leases were not optimally structured/worded. A one level quasi-regional mall/entertainment center had a group of tenants with upper levels. The leases were worded in a way that the tenants paid additional charges on only the main level of their premises. In one case, the tenant had nearly 11,000 sf total, but only 1,000 sf on the main level. The tenant was required to pay additional charges on only the 1,000 sf. Therefore, unless the other leases were worded properly, the landlord would have to absorb the additional charges on the 10,000 sf.

Ideally, the other leases would have read that the tenants pay a prorate share of the additional expenses based upon the ground floor area of the center. This would have excluded any square footage above or below the ground floor from the denominator. This language did not exist. It could have read “excluding square footage above or below the main level” which would have included the square footage to begin with, but then defined that area to be excluded. The leases did not contain this language. The leases could have excluded “any tenant not paying a full prorate share” of additional expenses, but they did not.

Therefore, for the most part, the landlord is absorbing additional expenses on this upper level square footage. Prospectively, we may be able to use the “any premises not fronting on the enclosed mall” exclusion that exists in most of the leases by having two separate leases for the tenants with multiple levels – then we would have one premises fronting on the enclosed mall and another premises not fronting on the enclosed mall.

Why even bother with this? The total upper level square footage at the property is about 70,000 sf. Total additional expenses per square foot are nearly $40.00. That is currently $2.8m of absorption per year. Apply a 7% cap rate to that – that is $40m in value. Seriously, $40m in value! For lack of better lease language!

Think about the big picture when you are considering your lease language!

Excluded Areas – Premises vs. Occupants

In defining excluded areas, a lease will often read:

“the tenant will pays its prorate share of the charges based upon the gross leasable area of the center excluding premises greater than 15,000 sf…”

Others may read:

“the tenant will pays its prorate share of the charges based upon the gross leasable area of the center excluding occupants (or tenants) greater than 15,000 sf…”

When you are setting up your reconciliations in your property management system, you focus on “15,000.” Both include the 15,000. However, one is “premises” and the other is “occupant” (or tenant).

When the language reads “premises,” it does not matter whether the premises is occupied or vacant. The space itself is the excluded area. When the language reads “occupant” (or tenant), it is an excluded area only when that space is occupied.

You may think to yourself that it does not matter in your leases because your standard lease requires the tenants to pay based upon leased an occupied area rather than leasable area – so if the space is not excludable as a premises, it is excluded as a vacancy, and that may very well be the case. However, if any tenants have negotiated minimum occupancies, your exclusion of the space as a vacancy may be limited.

Bottom line – make sure your leases read “excluding premises greater than xx,xxx sf.” You will save yourself a tremendous amount of aggravation (and cash flow)!

Hurricane Harvey, flooding and your lease obligations

A friend emailed me a suggested topic for this coming Sunday’s blog post. 「So with the events in Houston, is it time for a blog on Rent Abatements in Damage and Destruction clauses?」

Clearly, it is. And, as landlords and tenants are not going to wait to start paperwork for claims until Sunday, it is time for a Thursday blog.


Photo from American Urban Radio Networks (

It is rare to see too much negotiation around 「Damage and Destruction」 or 「Reconstruction」 or the portion of the 「Utilities」 clause related to the unavailability of utilities, or to 「Business Interruption Insurance.」 And, honestly, when landlords summarize their lease requirements in an abstract, most of these clauses are not captured because, for the most part, the clauses rarely come into play. But, in the coming weeks, they will be front and center for property owners and tenants alike.

There is only one 「pat」 answer for who is responsible for what in terms of reconstruction, the payment or abatement of rent, damage-related terminations or so on, and that answer is that the responsibility is defined by each individual lease.

Typically, the damage and destruction section of the lease will define whether it is the landlord or tenant that is responsible for the reconstruction of the premises, and, more often than not, the party responsible for obtaining the property insurance on the building itself (as opposed to the contents), will be responsible for the repair/reconstruction.

The leases will also address whether or not the tenant is responsible for the payment of rent during the reconstruction period. Again, with the 「more often than not」 comment, there will be an abatement of rent during the period of reconstruction. But, it is not unusual for the tenant’s rent responsibility to continue. You will find that when it is the tenant responsible for rebuilding, it will be more common for the tenant being required to continue to pay rent during the reconstruction period.

Often buried in the lease is a requirement for the landlord or tenant to carry business interruption insurance. Again, it would be more common for a tenant responsible for reconstruction and for the payment of rent during reconstruction to have also been responsible for carrying business interruption insurance. The business interruption clause typically will address the prior the landlord or tenant the insurance is required to cover – often 12-18 months. It will often follow that if the landlord is required to reconstruct, and the tenant gets an abatement during the repair/reconstruction, then the landlord would have been required to carry the insurance covering the period. (The tenant likely paid either a prorata share of the insurance, or paid for it as part of a fixed CAM/operating charge.) The opposite is likewise true. If the tenant is required to repair and pay rent during the down time, they would have been required to carry the insurance. That being said, I just pulled a lease for a national sandwich shop at a property outside of Houston where the standard lease included business interruption insurance as part of the landlord’s responsibility with the tenant paying a prorata share. But, the requirement was stricken from the lease by the tenant.

Another issue to consider is that leases often include language giving the landlord and/or tenant the right to terminate the lease if the damage/destruction occurs in the last x months or years of the term. Over the years, we have seen damage destruction in a transitioning area being used to clear out a property to make way for a completely different tenant mix.

Also to be considered an issue addressed in an earlier blog – 「when minimum rent is abated, the breakpoint shall likewise be abated.」 Keeping it simple, if a tenant’s annual breakpoint is $1,200,000 for the year and they have a 12/31 lease year end, a Houston tenant will pay percentage rent for 2017 based upon sales through 8/31 over a denominator of $800,000 ($1,200,000 x 8/12. I am oversimplifying the other variables). Then let’s say it takes 12 months to restore the property. For 2018, the tenant will pay percentage rent using sales for the year (just 9/1-12/31) and a breakpoint of just $400,000. Knowing how sales typically fall, they may end up paying no percentage rent for 2017, but a disproportionate amount for 2018 (and since it will not really be considered a partial year in either case, any extended or extended partial lease year language (addressed in yet another earlier blog) will not be there to protect the tenant.

And, just when you think you may not have issues because your property was not damaged, in many cases, even though it is beyond the landlord’s control, if utilities are not available at the property and the tenant cannot operate, there may be related rent abatements. It never ends!

I wish there were better, more universal answers that I could give. But, yet again, the answers lie in the leases.

Realizing the intended benefit of a tax abatement

It is not uncommon for a municipality to work with a property owner to them achieve some mutually beneficial goal – usually because the project might not otherwise be feasible without some sort of public assistance. Among the reasons a municipality may be considering the inventive,, they may be doing it to bring new jobs, protect existing jobs, to help spark a development corridor, or to prevent or reverse a property from becoming blighted. The assistance can come in many different forms, one of which is a tax abatement.

If the intent is for the abatement to benefit the landlord so that it can be used to help finance a project, the leases have to be worded in such a way or the landlord may not realize the benefit.

A simple example would be if a property owner was being billed $500,000 in real estate taxes and the tenants of the property pay a full prorata share of taxes. The landlord pays $500,000 in taxes, bill the tenants $500,000, and (if they are at 100% reimbursement) collect $500,000 from those same tenants. If the municipality grants the landlord a tax abatement so that the landlord can use the $500,000 per year towards a project, without specific language in the lease, the benefit flows to the tenants, not to the landlord. The landlord would receive a tax bill for $0, and then could not bill or collect any taxes from the tenants. Therefore, the tenants receive the benefit of the tax abatement.

However, the addition of a few lines in the standard lease form can ensure that the landlord receives the intended benefit. A simplification of the language would read something to the effect of:

「If the property is the beneficiary of any real estate tax abatement, the tenant will pay its share of taxes absent such abatement.」

With this language, the landlord would receive a tax bill of $0, but would bill the tenants their share of taxes 「absent such abatement,」 or $500,000. The landlord then has collected $500,000 with a $0 tax bill, and the funds are available for the project.

I have seen one 「workaround」 by a landlord and municipality when this language did not exist in the lease. A service contract was negotiated for the period which would have otherwise been the abatement period. The service contract was where the property provided services, including jobs and education fairs, community events and other 「services」 which the property was already 「providing.」 In that case, using our same numbers, the landlord was billed $500,000 by the municipality and was then able to bill the full $500,000 to the tenants. Upon receipt of the payment by the landlord, the municipality then made its service payment to the landlord. The landlord then had the $500,000 per year available for the intended project.

With more B and C properties losing anchors, it is likely we will see the need for more public/private partnerships to redevelop properties to thrive in new ways. Lease language must be considered for these partnerships to work.

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