News

Premises trash and utilities vs. common area trash and utilities

June 9, 2019

It is not uncommon for a landlord to provide or arrange services for the actual tenant premises within a shopping center. Perhaps the tenants are provided water services to their spaces through one water main/meter, or the landlord arranges for trash removal from the premises rather than having each individual tenant arrange the service themselves. Or in some cases, there may even be electricity or HVAC provided by the landlord to the individual premises.

In the majority of leases, these services for the tenant’s own premises are addressed in a utilities section of the lease (with language that may read something to the effect of: “Tenant is responsible for all utilities consumed at the premises. If the landlord provides any of these services to the tenant, the tenant will purchase the same from the landlord at rates not greater than the tenant would be billed if the tenant were billed directly.”) Trash removal can sometimes be found in the utility section, the tenant maintenance, or even in the rules and regulations section/exhibit of the lease, containing similar responsibility language.

But this provision of services by the landlord can sometimes cause confusion, as it did three separate times this week. These services provided to the premises are NOT common area expenses. In most shopping centers, the landlord does provide water to the common areas of the center, and the cost of that water is absolutely CAM. However, water provided to the tenants for use within their premises is not CAM. It is a premises utility. The landlord’s removal of trash/emptying of common area trash receptacles is CAM, but the cost of removal of the trash from the individual tenant premises is a tenant expense. If the landlord happens to provide for or arrange the trash removal service, it is still a tenant expense, not CAM.

Often in attempt to simplify billings to the tenants, it is not uncommon for landlords to include these expenses in CAM and bill the same prorata shares used for CAM for these additional expenses. However, this attempt at simplification can cause some major errors.

One group of tenants to jump on this error in methodology is big boxes and supermarkets. So often, despite what is happening at the rest of the center, the big boxes do not participate in the landlord’s trash program and have also made the installation of separate meters for water or electricity a key component of their leases. Therefore, if the landlord were to bill trash or premises water through CAM, and those big boxes arrange and pay for their own trash removal and water directly, the landlord would be double dipping. Not that it doesn’t happen, but big boxes challenge this method regularly. (I don’t want to get off topic, but if the landlord gets one invoice for trash or water that covers premises trash removal and common area trash removal (or water), often the landlord and bid boxes will come to an agreement on an allocation of these invoices among premises and common areas (often 90/10 or 95/5 – so a $50,000 trash invoice might get allocated $5,000 as common area trash permitted to be included in CAM, and $45,000 as premises trash not permitted to be included in CAM).

This CAM inclusion method often causes tremendous amount of absorption by the landlord. If a tenant’s CAM method is leasable with no exclusions, a landlord might bill trash that way (by including it in CAM). However, in that center, if there was a major that provided its own trash removal and did not participate in the expense, and there was some vacancy, the landlord would be absorbing a significant portion of the expense. Take the following example:

trash

In our example, if the landlord bills the tenants premises trash using the CAM reimbursement method (GLA with no exclusions), the 30,000 sf of tenants that are provided with the trash removal service will have paid $7,500 (30,000 sf x the $.25/sf portion of the charge attributable to premises trash). The landlord will have absorbed $17,500 (major (60,000 sf) plus vacancy (10,000 sf) = 70,000 sf x $.25/sf. What does that mean? We as the landlord lose $17,500 per year, or, at an 8% cap rate $218,750 in value ($17,500/8%).

All because we tried to simplify the billing method.

In a specific example from this week, the tenant’s actual CAM charges were $3.70/sf, but CAM was capped at $3.47/sf. But over and above the $3.70/sf, the landlord was billing premises trash through CAM – another $.25/sf (reflected as $3.95/sf – $3.70 + $.25). The tenant expected all charges to be capped at $3.47/sf. But that $.25/sf was not CAM! So, ultimately, the tenant was responsible for $3.47 + $.25 = $3.72/sf. This was a 16,000 sf tenant. That difference was $4,000 per year. One lease, $4,000 per year.

It really does pay for you to know the difference between common area services and premises services!

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

Extending a lease term – by exercise of option or amendment

June 2, 2019

Exercising an option that was granted in a lease with no change in terms should be a fairly simple exercise as specifically defined in the lease – often sending notice to the landlord on the intent to exercise with no additional action required by any party. The lease continues.
However, sometimes the parties overcomplicate the issue and produce unintended consequences. For example, I was just abstracting a lease that commenced in 2010. The lease granted one five year option at $27.50/sf to be exercised by giving notice to the landlord 210 days before the expiration of the term. The expiration of the term was 10/31/15. Notice would have been required by the beginning of April. In July 2015, an amendment was executed extending the term from 11/1/15-10/31/20 at $27.50/sf. The amendment included typical language – “Except as expressly modified and amended by this Amendment, the provisions of the Lease shall remain in full force and effect…” Therefore, despite the fact that the tenant had not exercised the option on a timely basis, the terms of the lease remain in effect. The term was extended.  The amendment contained no language stating that the amendment was an exercise of the option. No language stating that the tenant shall have no further rights to extend the term.  Therefore, while likely not the intent, the tenant can claim that it has the right to extend the term for five years commencing 11/1/20 at $27.50/sf. Sometimes, you can get around this if the option form the lease is for specific dates or years. But in this case, no such luck.
It is imperative to think through how the language in an amendment affects  the original lease.

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

Taxes and insurance addressed in CAM – and then again, separately

May 5, 2019

It’s not unusual to see terms referenced several times throughout a lease. Often, it will be a definition of a concept in one clause and the use of that defined term in another. But, sometimes, it can be confusing as to why a term is mentioned multiple times.

Case in point is when insurance or real estate taxes are included in the definition of common area maintenance (CAM). The lease may require the tenant to pay a prorata share of CAM – so the tenant is paying a prorata share of insurance and real estate taxes through CAM. But the lease may actually continue with a separate real estate tax and a separate insurance section, each requiring the tenant to pay a prorata share. We addressed this issue a couple of years ago in a blog (Common area taxes and liability insurance).  But, this week, we were working on an acquisition that put a slightly different twist on this.

A brief recap – When you see taxes and insurance addressed as part of CAM and then separately, a light should go off. The common area portion of real estate taxes and the common area portion of insurance are included in CAM, whereas the taxes and insurance on the leasable portions of the center are billed as separate charges. Insurance and taxes on the parking fields, on the mall areas, on the sidewalks, on all of the common area are billed in CAM. But, the insurance and taxes on the actual leasable spaces are billed separately.  The earlier blog addresses methods of calculating the common area portions of those charges.

So what’s the twist that warrants a new blog.  (I apologize in advance, it gets a little convoluted here!)

For this particular tenant (a junior anchor, so sizable), the tenant’s CAM was capped while the separate insurance and real estate tax sections were not. And, unlike the majority of cap clauses negotiated into leases, this clause did not have the most common exceptions from the cap for insurance, utilities, taxes and snow removal. (It would read something to the effect of “Tenant’s share of Controlled CAM shall be capped at 5% over the Tenant’s share of Controlled CAM for the prior year. Tenant shall pay its full prorata share of Uncontrollable CAM. Uncontrolled CAM shall include insurance, utilities, taxes and snow removal.” There are quite a few other blogs that address cumulative vs. non-cumulative caps as well that must be considered.) The reason that those exceptions typically exist is that, as the language implies, the landlord has no control over certain expenses (or limited control – there is always some control) and the landlord should not be penalized for exceptional increases to those expenses.

What does that mean then? That means that the common area portion of taxes and insurance is capped, while the premises portion of those charges is not capped. When you consider the requirements of the lease item by item, the calculation is fairly clear. But, in this case, the requirements were not consistently applied.

When billing the tenant, the landlord included ALL real estate taxes and ALL insurance in CAM, and applied the cap to the ENTIRE CAM charge – no exclusion of and portion of taxes or insurance from the cap.

Most typically, you would expect that, if the landlord capped a charge that was not supposed to be subject to a cap, the landlord had potentially underbilled a tenant. Let’s take the following example of CAM subject to a cap and taxes not subject to a cap.

no cap on taxes

In the example above, with no cap on taxes, the landlord would absorb about $21,000 in years two and three for CAM, but nothing for taxes. However, if taxes were also capped, the landlord would absorb another $52,000. That is a fairly good example of why taxes might be excepted from a cap – taxes increasing materially but the landlord having no control.

However, consider an example where taxes are remaining steady.  Like the selling landlord, if the landlord incorrectly included taxes in the calculation of the cap, the landlord would have absorbed only $14k because of the cap rather than the $21k it should have absorbed.

Incorrectly applied cap

So in this latter example, the landlord would have overstated the property’s NOI by about $4,600 in year 3 (the difference between absorbing $13,910 if billed correctly and $9,343 as billed).

Further complicating the issues this week was the fact that for purposes of billing the tenant, the landlord had included all taxes in the cap. However, when presenting the cash flow to prospective buyers, the landlord excepted ALL taxes from the cap, not just the premises portion.

The end result in our particular instance is that the seller did, in fact, overstate cash flow (when we might have expected the opposite to have been true) by including taxes in CAM, subject to a cap.

Unfortunately, sometimes the application of lease language can result in a cash flow that varies from what was intended.

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

Bring back my favorite retail real estate memory of the 70s!

April 28, 2019

Space_Port_01

Neshaminy-Mall-Freedom-Wall

I was born in 1965. As much as I loved Space Port (an arcade) at Oxford Valley Mall and the wall of history dioramas at Neshaminy Mall (which I understand are still on display), I did not discover my favorite thing about 1970s retail real estate until I started reading department store leases and shopping center REAs (reciprocal easement agreements), OEAs (Operating and Easement Agreements), COREAs (Construction, Operating and Reciprocal Easement Agreements) and many similar documents.

Back in the 50s, 60s and very early 70s, in the  infancy of regional mall development, the anchors had certain rights and approvals – which other department stores could come in to the center, what type of stores could be in the center, and, often, especially in their own mall courts, absolute rights over which specific tenants could be nearby. It was common to see a long list of tenant names, so many of which are lost to the ages, that could or could not be located in mall or courts. And, there was regular correspondence  regarding those approvals.

Almost every department store in the country sent unilateral agreements to their landlords rescinding these approval rights

Then, in 1973 or 1974, apparently in response to some anti-trust legislation (feel free to chime in if you know the specific case), my favorite part of 1970s retail real estate occurred. I can’t say for certain that it was every, but I can say almost every department store in the country sent unilateral agreements to their landlords rescinding these approval rights. No use of the rescission as leverage to get something else from the landlords. For the good of the health of the property, for the good of a healthy tenant mix, landlords were then free to do their best to create a tenant mix that would maximize sales.

For years, those unilateral agreements created an environment for healthy regional malls.

And that is what I think we need to bring back. Another critical part of anchor leases and operating documents are specific approval rights over types of uses which may not be included in a  (often written as a “first class”) regional mall or shopping center. Some specific restrictions make you wonder. No funeral halls or crematoriums. No rendering facilities (so you don’t have to look it up like I did the first time I came across it, an animal processing plant). And, speaking of rendering plants, no abattoirs (slaughterhouses).

But, wouldn’t you love the opportunity (in the right environment) to have an Alamo Drafthouse? A Lifetime Fitness? A Whole Foods? A Main Event? Today, the majority of these agreements still specifically prohibit uses like movie theaters, health clubs, schools, supermarkets, automobile sales, entertainment facilities and so many other uses we would love to have in our centers – the uses that would make for a strong mixed use property, or for a city center type concept.

Residential? Office? No WeWork or multifamily permitted. How about a new city hall or library? Not permitted.

Naturally, you have the option to go to the anchor that has that restriction language in its agreement to try to get it released. But, as is so often the case in our industry, despite the fact that it would be good for all parties involved, the release of that restriction is going to cost the landlord – financial implications, and, much more importantly, time – often to the point where the opportunity for this currently restricted use goes away to another property where the restriction does not exist. And, that lost opportunity may have been a one time opportunity.

So, yes. Bring back the 70s. If I need to wear marshmallow shoes and wide ties and lapels so that we can see some unilateral releases from anchors, I will gladly do so.

This is a critical time in the evolution of retail. Give the landlords the opportunity to change the tenant mix at a property to what is now, and what will be in the future, the new highest and best uses for the center.

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

An approach to lease administration and due diligence

April 14, 2019

When we are verifying rents at a property, we do all of our calculations – prorata shares, caps, breakpoints, CPI calculations, lease year language applications and so on – prior to looking at what the current landlord has done. I don’t know about you, but I can be fairly easily led by what someone else has done because, well yes, it does make sense. But, doing the calculation first forces you to calculate what you believe is right. The current owner’s calculations then become a kind of answer key. If I calculate what the landlord had calculated, then we are good.
However, if I calculate one amount, and a landlord has calculated another, I have an opportunity to either correct my calculation, or correct theirs. This act of reconciling the billings (or even just verifying the abstracts) is where so much opportunity lies.
Because there are thousands of details per lease, and sometimes hundreds of charges per tenant per year, this industry has a tendency to “do it the way we did it last year.” If a mistake was made, it is perpetuated throughout the term of the lease. If an interpretation of a lease clause or application of lease language may have been made incorrectly , again, it is perpetuated through the lease term.
Someone applies a cap after a first partial lease year to a partial year charge instead of an annualized first year charge. Then the third is calculated off of the second, the fourth off of the third. In those subsequent years, the cap is being applied correctly, but off of an incorrect charge.
A lease defines outparcels as excluded areas, and any pad is set up as an excluded area. Once and done. No one will question that prospectively. But, what if the lease defined “outparcel” as any premises not fronting on the enclosed common area.  That issue is perpetuated.
If I review a landlord’s calculation and see that outparcels are excluded, I can easily see that language in the lease and concur with their billing. But, if I read the lease first, I am absolutely going to see that “outparcels” also include non-fronting. I will calculate the charge excluding not only those pads, but the non-fronting areas as well. And, after I have done my calculation, I will see that my calculation and the landlord’s calculation varies. And, right there is where you find the upside.
In a world of “do it the way we did it last year,” our method is brutally, truly brutally, time consuming.
But, honestly, with this method, there is money. There is always money.

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

1 2 3 4 5 6 … 19