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“That’s standard” is not a good enough answer.

Two or three weeks ago, we were working on a portfolio acquisition. There was an outparcel ground lease tenant that had the right to purchase its premises if the landlord ever sold the property. Our client asked the seller for the tenant’s release from its option to purchase the parcel. The seller replied that it did not apply because the sale was part of the larger parcel. “It’s standard” was the response.

Is that typical? Absolutely. But, in almost every purchase option I have ever reviewed (hundreds, possibly pushing thousands), the purchase option reads “unless the sale if part of the larger sale of the center.” Almost. Those words have to be in the lease.

I can’t tell you the number of leases that are out there that require the tenant to deduct contributions from anchors, variety and other defined excluded areas, but continue with excluding only the square footage of the anchor tenants. Is is “standard” (most typical) to exclude both the square footage of all tenants whose contributions are being deducted. Again, absolutely! But, not always. Along the same lines, there are times when the square footage of anchors, variety and outparcels are defined to be deduction from the denominator, but only the contributions of the anchors (or in some cases, no contributions at all) are to be deducted. Is it standard to match square footage with contributions? Absolutely.  But, unless it’s a mom and pop tenant, there are exceptions to what is “standard” in every lease.

Don’t assume something is “standard.” Spell it out! Don’t let it come back and bite you!

You really expect the landlord to absorb CAM and taxes on non-existent space?

A few months back, we addressed what happens when you leave phantom square footage in the denominator. But, this week, we actually had a lease where the tenant requested (AND THE LANDLORD AGREED!) to add square footage to the denominator for purposes of allocating CAM and taxes.

First off, this was not a local developer that agreed to this language. Rather, it was a sophisticated, national developer with power and grocery anchored centers across the country. And, the tenant happened to be a fairly desirable big box.

The lease language stated that if any part of the common area was used for sales or storage, the square footage had to be included in the denominator for purposes of allocating CAM and taxes for the tenant (the big box tenant with this language).

What you should be aware of is that gross leasable area typically includes only enclosed, heated and cooled spaces used for retail sales or services. For example, think about a discount superstore. There is often an administrative office mezzanine area. Usually, that square footage would be excepted from the total GLA. However, we have grocery stores in our area where the mezzanines are used for demonstration kitchens and classes. That area is typically included. Similarly, walk into the garden center portion of a home improvement store and the portion not air conditioned is typically excluded.

However, in this case, if a tenant (including itself) was permitted to park a storage trailer out back for 2 months a year, the 640’ would have to be included in the denominator for this particular tenant. The lease did not even address including only the weighted average square footage (where we would do 640 sf x 2/12). If you have multiple tenants (or events, including sidewalk sales), you have to include that square footage. You can see, it adds up.

On the 30,000 sf tenant, that is $5,100 per year. Cap that, and it is nearly $100,000 in value on the center!!!

What does this mean in terms of dollars? Let’s take a center that is 200,000 sf, and the big box tenant with this language is 30,000 sf. If our total CAM and taxes for the center were $1,400,000, a tenant paying on typical gross leasable area would pay $7.00/sf. ($1,400,000/200,000 sf) However, if we have 5,000 sf of common areas used even temporarily for sales and storage, the rate per square foot would drop to $6.83/sf ($1,400,000/205,000 sf) – a difference of $.17/sf. On the 30,000 sf tenant, that is $5,100 per year. Cap that, and it is nearly $100,000 in value on the center!!!

What makes it even more offensive is that a trailer or temporary selling space would not be considered when assessing the center (so there would be no increase in taxes) and in almost every instance, the tenant granted temporary use of the space is responsible for all expenses related to its use – so no increase in CAM.

Can I put a cherry on top of this? Yes, I can!!! If the big box tenant was the only tenant to have made use of that 5,000 sf, the lease only included the space in the denominator, not the numerator!!! That means, the more usage of the common areas this particular big box tenant uses, the less they pay!!!

Hopefully, we won’t see this language too often. But, when one landlord agrees to a clause, no matter how crazy, tenants get emboldened and present that language with another landlord as a precedent.

If you are ever unsure how to consider the impact of a requested change, feel free to comment, and I will try to give you the pros and cons of the language.

Learning and improving throughout your career

For over 30 years, I have had the opportunity to work within some of the most well respected companies in commercial real estate. Each has its own way of doing things – their own sets of processes and procedures.

I have heard comments ranging from “No one does it as well as we do,” to (and, pardon the French), “We suck. We are so inefficient.” However, in a majority of those cases, the opinions are diametrically opposite of the realities of the situations. The best companies in this industry (and, likely in any industry, but I can only speak for real estate) are those that are never satisfied with their performance. They are always looking for a way to do something better.

A few year back, we worked with a company that was very satisfied with its performance administering its temporary tenant program. They had a staff of 11 for about 5,500 agreements per year. We came in, and after about a month, helped them get it down to 1.5 people. They were thrilled. But, at the same time, one of our clients (who was never satisfied with their performance) was administering nearly 50,000 agreements per year with the same number of people – 1.5. Even then, they were looking to do better. They were not satisfied and were looking for ongoing improvement and, because of that approach, could run circles are the “no one does it as well as we do” company.

In another instance, early in my career, a client was getting ready to put in an offer of the shopping center that my wife and I had done our grocery shopping at for years. As far as I was concerned, I knew that center like the back of my hand. It was shaped a bit like the big dipper, with all of the retail facing out (the pot portion of the big dipper was a truck service area) with anchors on either end, and the grocery store in the middle (at the bottom of the pot).

center

We walked the center a few times. He stopped on one of the passes. I was thinking that he was going to talk to me about his offer strategy. But instead, he said, “Jack, what you basically have here is three separate centers that have to be considered individually.” And, he went on to share some other words of wisdom about the center – the one I had known so well and yet had never seen it the way he had. He showed me that I would be learning and needing to improve throughout my career.

In that same vein, even the International Council of Shopping Centers (the ICSC), in its 61st year, is revising both its educational and certification programs. You might think that after all that time, they could sit back and rest on their laurels. But, like other great companies, this organization is looking for ways to improve. Look for great things over the next year.

And, think to yourself, that if the ICSC can seek to learn and improve after 61 years of serving the industry, you can make the same effort yourself. It pays off!

Why you should be at least slightly conversational in accounting, finance and lease administration

“Ambitious men do not ask questions for fear their infallibility will be challenged” – Washington (or John) Roebling

My apologies to David McCullough who wrote The Great Bridge about the building of the Brooklyn Bridge for not even knowing whether it was Washington or John Roebling who gave us that awesome quote above. But, whether father or son, he was lamenting some of the problems he was having with construction because certain supervisors would not ask questions that needed to be asked.

Since 1996, the International Council of Shopping Centers (ICSC) has offered finance and accounting classes for professionals in the industry that may not have to deal with finance, accounting or lease terms on a daily basis. Since you can’t teach finance and accounting in two days, my goal in teaching portions of the class has always been to get the students comfortable to learn enough to know what they don’t know, and be willing to ask questions – to help them understand that no one has all of the answers.

Why this blog today? Over the last week, I have seen a number of articles and press releases where I have thought, “Oooh! I wish they hadn’t presented it that way,” or, “I wonder if they checked with lease administration on that.”

One article related to a new source of parking revenues. We are always looking for ancillary revenues in our business, and a few companies promote ways to generate revenues from existing spaces. Any way to generate additional revenue from existing assets can be wonderful – provided you think through how the property may be affected. Will spaces assigned for revenue generation still be considered part of the parking ratios? Do some of the leases have prohibitions against charging for parking? Does the revenue need to be offset against CAM? If so, will it be the gross revenue or the landlord’s share of revenue?

Another article related to a company announcing new tenants coming to a property to backfill vacant anchors. The company is adding some “experiential” uses. I would be happy if they were coming to my local mall. However, the press release addressed “and other non-retail uses.”  Fuel for the fire. Shopping centers are going through another step in their evolution. What may never have been an acceptable use in a shopping center (think a brewery or distillery or a health club facility or even multi-family) is slowly becoming not only an acceptable use, but in some cases, a desirable use. While some of these “new” uses may not be retail, they are becoming shopping center uses. The press release reads “non-retail.” Many leases address a percentage of retail uses that must be located in the center, or a percentage of “traditional shopping center” tenants for cotenancy purposes.

These are just two from the week. But, you regularly see issues addressed that, if they had been run by multiple departments, may have been presented differently – expansions or additions that, if presented properly, might have warranted a minimum rent increase. Renovations or replacements that might be considered CAM. The list goes on.

There truly is value in knowing what you don’t know. (And, the next time ICSC offers the class, look into it. I will give you some good information, but the others that also teach are outstanding!)

The secret to a really good abstract

There really is a secret to a good abstract and, I apologize in advance because it will sound a little patronizing at first, it is to read the lease and fill out the abstract. Seriously?  It does sound patronizing, doesn’t it? But, it is very obvious reviewing an abstract that has been completed using the more common method – complete the abstract by finding the information in the lease.

Is there a difference? Absolutely. The common method is one we refer to as “hunt and peck.” You need to fill out the co-tenancy section in the abstract, you go looking in the lease. And, then, when you find it, you may do a cut and paste of the entire section. Is that portion of the abstract complete? It will absolutely look like it. You have four or five paragraphs related to cotenancy. However, is it really complete? Odds are – no.

When you read a lease and complete and abstract, you read through parts of the lease that apply to many different sections. For example – the definition of Shopping Center and the definition of Gross Leasable Area. Whether the Shopping Center is defined to include all of the anchors, or the outparcels, or the adjacent wholesale club may impact a tenant’s tax or CAM or insurance calculation. Or whether the landlord is even required to provide common area liability or property insurance on a parcel. It may impact an exclusive. If Gross Leasable Area is defined as something like the ground floor area of the shopping center, or as the area available to lease to retail tenants may impact whether that second floor office space or the hotel or multi-family space in the center is included.

A good abstract takes the information from various parts of the lease and dispenses it throughout the abstract to where it is needed. Think about a clause that might state that the tenant has the right to terminate the lease after the fifth lease year if sales are less than $500/sf. A good abstract will address whether an initial partial lease year is or is not the first lease year. It will take that $500/sf and consider whether a lease for a 2,600 sf space but is based upon 2,500 sf should apply the $500/sf to 2,600 sf or 2,500 sf.

A hunt and peck of either of those two abstract sections might get you a couple of paragraphs each, but may not address those other factors that truly change the requirements.

If you read through the lease, you may see the requirement that the landlord is required to paint the interior of an anchor tenant’s premises once every ten years, and you can plan for it. If you are doing a “hunt and peck” abstract, there may not be a spot on the abstract requesting such a requirement, which may lead to a nasty surprise when the tenant asks the landlord to fulfill its obligation and you find that you will be $250k off in the budget.

It may seem like semantics – “read the lease and complete the abstract” vs “complete the abstract by finding the information on the lease.” But, it makes all of the difference in the world.

This blog is not intended as a recruiting tool. However, if you see those two statements as more than semantics, and you are one of the odd few that truly enjoys reading leases, you should probably be with us! And, if you can see and appreciate the difference between the two statements but really don’t want to read the leases, we are here for you!

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