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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

CAM, tax and insurance reconciliations during due diligence

August 5, 2018

storage

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

The “new” reality

July 15, 2018

Crystal-Ball

In 1995, there were approximately 1,800 regional malls in the US. At that time, ICSC (the International Council of Shopping Centers) published articles and held sessions at conferences addressing the then-current predictions that 25% of those regional malls would close, and there was a need to find alternative uses for regional malls. A few years earlier, at either the ICSC Spring Convention (now ReCon) or the Fall Management and Marketing Conference, one of the speakers (I believe it was Dr. Peter Linneman) made the statement that the regional mall development business (and to a certain extent even the open air shopping center development business) was a one generation business – the generation of Herb and Mel Simon, Ernest Hahn, Eddie DeBartolo Sr., the Bucksbaums, Henry Faison, Leo Eisenberg, Mal Riley, Norm Kranzdorf and so many others who made their names and fortunes (and sometimes lost and made them again).

That was 23 years ago, and there was already discussion of alternative uses for regional malls and vacant department stores. Last week, I read a story that another traditional regional mall would never be built in the US. “Never” is a mighty long time. But, as those 23 year old stories prove, this is not “breaking news.” The industry has been expecting this, and has been preparing for this, for over 20 years (it may actually be pushing 30 years as articles about “de-malling” and converting department stores to data center and other uses started appearing in the late 1980s).

Today, depending upon how you classify them, we have somewhere between 1,200 and 1,300 regional malls. Just about 25% of those 1995-era 1,800 malls no longer with us in their original form. And, today, the experts predict that 25% of today’s population of regional malls will no longer exist over the next 10+ years. But, really, while some will go away completely, most will continue to exist, just in an evolved format.

The ICSC and the leaders in this industry have had their eyes wide open for years. Leasing, asset management, development and the other disciplines have been adapting their long term plans, changing lease language, anticipating and planning for what the future will bring. It is because they are the ones bringing the future. The mall and open air shopping center development business may have been a one generation business, but that next generation of David Simons and Stephen Lebovitzes and their contemporaries are finding and creating even more value in the evolution of regional malls and open air centers.

Maintaining and enhancing value has always been what our industry is about. It may look a little bit different, but that is the future of the industry too!

Comments | Posted in 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

Distorted sales and sales audits

June 24, 2018

Over the past 2 months, there have been a number of stories about tenants “distorting” sales including this one in Shopping Centers Today –

https://www.icsc.org/news-and-views/icsc-exchange/tenants-should-include-more-internet-returns-in-reported-sales-simon-says

It is almost presented as a “breaking news” type item, but this issue, including internet returns and its technological predecessor, catalog returns, has been an issue as long as tenants have been reporting sales and consumers have been returning items ordered outside of a store location. The issue occurs when a consumer makes a purchase that was not made in the store where they are returning the item. It that particular location was either over its breakpoint or approaching its breakpoint, a $150 return could mean a $9 loss in percentage rent (at 6%).

Just this past week, while doing a cotenancy analysis, we came across a cellular provider in a center that had reported sales of $600k for 2015, $625k for 2016 and then just over $150k for 2017. Something was off. We reviewed the lease language specifically to determine if cellular contracts were excepted/excluded from reported gross sales. They were not. The breakpoint was just $650k.

Landlords have been aware of these and other issues and trying to combat them for years. Just a few things that keep companies like The Lamy Group Ltd. and Freed and Associates busy – firms providing tenant sales audits to ensure that tenants are fully reporting sales made at the premises. And, while you may think that the sole purpose of these audits is to generate additional percentage rent, there are many other reasons. One example is that a tenant’s lease is set to expire within the next 18 months and you will soon be negotiating a renewal. Knowing the tenant’s true sales will help you set rents for the renewal or extension term (using an occupancy cost ratio). Another would be that the tenant has requested rent relief and a sales audit helps to create an accurate picture of true sales. Or perhaps, you have provided a significant tenant allowance and the tenant’s lease provides a sales kickout/termination. A sales audit will help determine the risk of the exercise of the kickout, or whether you should devote marketing dollars to promote the tenant to protect your own investment.

While a headline of “Internet returns being used to distort sales reports” might make for good clickbait, the “issue” is not a new one and has always been part of the impetus behind a strong sales audit program.

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

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