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Minimum occupancies

September 2, 2018

When a tenant’s prorata share is based upon the leased area of a shopping center (rather than leasable), a very common change to the lease language negotiated by tenants is the addition of a minimum occupancy. The language would read something to the effect of:

“The tenant’s prorate share of CAM shall be based upon the leasable area of the premises over the leased area of the shopping center (with the addition of) however, in no event shall the denominator be less than 80% of the leasable area of the shopping center.”

Using the “leased” area of the shopping center, the landlord reduces the absorption it would otherwise experience due to vacancy. The purpose of the tenant’s added language is protect itself from the vacancy getting too high, causing its rate per square foot to get much higher.

A nice, simple example of the minimum occupancy in action would be a 100,000 square foot shopping center with 30,000 sf of vacancies where total reimbursable expenses for the center are $1,000,000:min occ

As you can see, by negotiating this clause, the tenant was able to reduce its expense by $1.79/sf. If vacancy had increased to 50,000 of the 100,000, without a minimum occupancy, the rate would increase to $20.00/sf, but with the 80% minimum occupancy, the rate would still be $12.50/sf.

If all of the tenant is the center were billed based upon the “leasable” area of the center, the rate per square foot in this case would be $10.00/sf ($1,000,000/100,000 sf). With 30,000 sf of vacancy, the landlord would then “absorb” $300,000 due to vacancies (30,000 sf x $10.00sf). However, if all of the tenants were paying based upon “leased,” the tenants would pay 70,000 sf x $14.29/sf = $1,000,000. Therefore, the landlord would have no absorption. But the minimum occupancy holds the landlord accountable for excess vacancy.

That was a simple example. It gets a bit more complicated when there are excluded areas defined. The minimum occupancies are typically calculated after deducting the excluded areas. For example, if there was a 25,000 sf tenant in our example center and that tenant was defined as an excluded area, we would calculate the minimum occupancy on 100,000 sf less 25,000, or 75,000 sf. In that case, actually “leased” area would be 100,000 sf – 25,000 sf (major) – 30,000 sf vacancy = 45,000 sf denominator. But with the minimum occupancy, we would compare the 45,000 sf to a 60,000 sf minimum denominator (75,000 x 80%). (In the case of the excluded area, we would also typically deduct the contribution from the excluded area).

 

Next week, I will give one more example – where there is an “absolute” minimum denominator. It’s a bit more complicated, and causes a few other considerations.

Comments | Posted in Malls, Retail Leases, Shopping Center, Uncategorized

How do YOU determine the value of a negotiated exception to a lease?

August 26, 2018

Any change made to a lease has a value to one of the parties. Some have very straightforward calculable values – reducing minimum rent from $25/sf to $24/sf or changing the percentage rent rate from 6% to 5%. Others have an absolute calculable value, but take a little effort to determine that value – changing the definition of an excluded major from 25,000 sf to 50,000 sf reduces taxes from $x.xx/sf to $y.yy/sf. However, others can have a material impact on the cash flow and value of a lease or a property, but the values are difficult to determine – giving up an exclusive, cotenancy or termination right.
ICSC is applying a “flipped classroom” concept to the upcoming John T. Riordan School for Professional Development in Minneapolis. The flipped classroom is where you do exercises in advance of the class to make the classroom experience even more valuable. As part of the Economics of the Deal class, students will look at five changes made to the lease for the most recent deal they have completed and attempt to assign a value to those changes. When we discussed this in my office last week, I couldn’t get my co-workers to stop talking about it.
So – just some food for thought for you –
When a tenant requests a change to the lease, what steps do you go through to determine the value impact of that change?

Comments | Posted in Malls, Retail Leases, Shopping Center, Uncategorized

The economics of a lease

August 12, 2018

Over the next week, I will be putting together a new class for ICSC’s John T Riordan School for Professional Development. The class will be offered as an elective for the Management, Marketing and Leasing tracks at the school which is being held September 23-27, 2018 in Minneapolis.

A previous version of the class focused primarily on discounted cash flow from the lease which I intend to incorporate into the class. However, I plan to also address:

  • The relationship of one lease and its impact on the balance of the property (and possibly the portfolio)
  • Premise by premise considerations for lease rates
  • Category by category considerations for lease rates
  • Building tenant improvement costs/allowances into the lease
  • How to protect yourself when you do give a sizable allowance (Security Deposits/Letters of Credit/Radius Restrictions)
  • Cotenancies
  • Termination rights (landlord and tenant)
  • Gross leases vs triple net vs modified gross leases
  • The cost of giving up certain standard lease clauses

If you have read this far, perhaps you were thinking another topic or two would be addressed in the class. Well, now is your chance to help shape the curriculum.

Please comment with any additional items you think you be valuable for inclusion.

Here is the link to the John T. Riordan School for Retail Real Estate Professionals. The School offers tracks for Leasing, Management, Marketing and Development, Design and Construction, as well as a new Leadership Institute.

https://www.icsc.org/attend-and-learn/events/details/john-t.-riordan-school-for-retail-real-estate-professionals5

Hope to see you there!

Comments | Posted in Malls, Retail Leases, Shopping Center

CAM, tax and insurance reconciliations during due diligence

August 5, 2018

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More often than not, when acquiring a property or portfolio, prospective purchasers are focused on future cash flows. When it comes to CAM, taxes and insurance, it is future reconciliations that will have the most impact on the buyer’s cash flow.

However, when acquiring a property, it is critical to get as many years of CAM, tax and insurance reconciliations from the seller as possible. While a purchase and sales agreement may put the burden for retroactive adjustments on the seller, a tenant doesn’t care where the credits are coming from – seller or buyer.

But, often, there is another need for these historical reconciliations. If a tenant has a cap on any charge, a buyer may need to substantiate prior billings in order to justify current caps – especially in the case of a non-cumulative cap where you may need to show actual charges on a year to year basis.

Just this week, we had a tenant in a center that our client had acquired two years ago. CAM charges were fixed for this particular tenant. However, every five years, the fixed charge was to have been reset based upon the actual CAM charges for the prior five years.

Without the historical billing files, there would be no way to reset the tenant’s charge, leaving significant amounts of cash flow on the table.

So, whenever possible, even though you may do nothing with it, get as many years of historical reconciliations as possible!

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

Squeeze another 353 sf out of that space!

July 1, 2018

This past week, we had a call with a long term client to review the results of a lease audit. Typically, it is the accounting people, perhaps some accounts receivable people and occasionally asset management. We review additional historical billings and expected increases to cash flow. But, this week was a little different, it was a group that, in addition to property and asset management, also included leasing. It was outstanding to be able to get all of the disciplines on the same page.

The following day, it really hit me just how valuable that approach was to an owner of shopping centers.

As you know, cotenancy is becoming more and more of a hot topic as the industry evolves. We regularly perform analyses to determine the immediate and long term impact of changes to the anchor and tenant mixes in a center – what is the one year financial impact, what percentage of square footage will have a right to terminate, do the leases also require a sales drop for cotenancy to kick in, can we replace a department store with a hotel? A theater? A restaurant/video/bowling combination? A health club?

On one of the properties we were analyzing this week, the landlord was able to bring in a health club to take some vacant inline space – just under 19,650 sf. It is actually a great addition to the center. But, unlike the first client that pulled all disciplines together, this one did not have the same level of communication. Therefore, when the deal was approved, no one considered that an additional 353 sf would have gotten that particular premises over the “major” definition for a number of tenants at the property. 20,000 sf was the magic number that would have made the health club count as an additional major – that would have provided an additional level of insurance against a cotenancy condition kicking in for a group of tenants that also happened to include two tenants that also fell in to the “major” category themselves.

That additional 353 sf would have … provided an additional level of insurance against a cotenancy condition kicking in …

The cotenancy condition at the property is currently not an issue. However, a meeting of minds across disciplines within the organization would have allowed someone to say “too bad it’s not 20,000 sf,” and another person to say “well, could we add 353 sf to the lease and just not charge them for it?”

As our industry evolves, it is more critical than ever to involve all disciplines within an organization to ensure that all aspects of a deal are considered.

Time for an interdepartmental group hug!

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

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