Unique retail environment

Next week will be back to the regular lease administration blog, but, for now, a little more Mexican retail. One sight in Puebla that does not show up on TripAdvisor is truly “experiential retail” – Container City. Puebla is very much a university town, and Container City is an area designed for those students. It is an area with bars, restaurants and some retail all set up in former shipping containers. While my wife and I were (by far) the oldest people there at 10:30 pm (my son said it did not get really busy until 12:00 am) and were way outside of the target demographic, we absolutely loved the concept – and the experience.

Liability issues aside, it was exceptionally well done.

Buen Fin!

This week, the blog will not be about lease administration. Rather, it is just a few pictures to give you confidence going in to the upcoming holiday retail season.

My wife and I are visiting our son in Puebla, Mexico this week. We happened to arrive during Buen Fin – the Mexican version of Black Friday. Traffic around the city is ridiculous and is attributed to Buen Fin. And, traffic in the malls, shopping center and streets is absolutely unbelievable. While there is nothing scientific about it, I am still a fan of “bag checks.” No. Not the bag checks going in to a concert or sporting event, but the visual bag check of whether or not people were buying. And, yes! They were buying.

For me, these pictures are better than any motivational posters.

(Just a couple of quick observations. If you look at the pictures, you will see that the anchors do not have grand courts. They are flush with the rest of the inlines, and they may online have a 50-60’ front lease line. Instead of having wall kiosks, flush with the front of the anchors, you then have a series of smaller premises (maybe 750-1,000 sf), making it much busier (in a good way) than our US anchor courts. Also, with Puebla being in a much more temperate climate, they had a good portion of the mall covered, but open air (you should see it in some of the pictures), eliminating the expense of mall HVAC in the part of the mall. And, finally, I have never see a food court busier. In the picture, you will notice shoppers sitting and finding space wherever they could, often on the floors and half walls. My son said that the quality of the local food court tenants is exceptional.)

Prior defaults

This past week, we worked on a 40 tenant open air center acquisition. Often times, a seller severely restricts the information provided to our clients, the buyers. Fortunately, this time, we had almost free access to the seller’s files.

Many of the leases were leases that had been amended and extended 3,4,5 times since their original commencements – some from the 80s and 90s. And, many of the tenants had been defaulted numerous times. The defaults in the files only related to the current seller’s period of ownership – from about 2012. But, these defaults (most were cured) are pertinent to the buyer’s acquisition of the property.

Why? For one, it lets you know what to expect for your period of ownership. If the aged receivables shows a tenant is current, it may not tell the whole story. In many cases, a pattern of defaults lets you know, in advance, that management will have to stay on top of a tenant to keep them current. Rather than being into ownership four months frustrated with a tenant that is now four months behind, knowing in advance that a default on the 15th of every month will keep them current will ultimately make for a much better landlord-tenant relationship.

But, there are other option, restriction and covenant related reasons to be aware of prior defaults. Many leases will have language that specifically eliminates certain clauses in the case of some number of defaults. For example – renewal options. The language might read something to the effect of “Provided the tenant has not been in default more than three times during the term…” In some cases, a tenant will add “… beyond any applicable cure period …”

Options and exclusives are the two more common areas to see this contingent default language. Think about what that could potentially do for you in the case of a tenant with below market options! Think about what that would do in the case of an underperforming tenant with an exclusive. It gives you options!

We have often addressed that once a lease is executed, you HAVE to live with the terms of the lease. However, in some cases we can actually view it as you GET to live with the terms of the lease.

If you search, there may be a silver lining!

Property managers and operations managers – Help me help you!


There is a really great class offered by ICSC fairly regularly, Finance and Accounting for Non-Financial Shopping Center Professionals. I have taught a part of this class since 1996. There is also another class, the Economics of the Deal/Lease. Both are for those in the industry that don’t have to regularly deal with numbers, and gets them comfortable with some of the language that the finance and accounting folks use. If nothing else, it helps the students understand when something might be a little bit off and needs additional follow up. While some of the students do sign up on their own, often, they are “encouraged” to sign up. Either way, you can often see when they realize how lease language affects the cash flow of a property.

I have been working on setting up a lease audit on an open air center for the past few weeks but have been delayed because of my inability to communicate why I need certain information, or rather, the importance of that information. This particular property is made up of 18 total tax parcels. The main tax parcels contains the main buildings – buildings be plural, as well as separate and distinct. A few of the smaller parcels contain multi-tenant buildings on pads. Some of the tenants have been billed water and sewer through CAM. Some have not. Some of the tenants have been billed fire and sprinkler maintenance. Some have not. Some are billed trash. Some have not. Same with all risk/property insurance. But, most of the tenant have been billed using the same, all-inclusive denominator.

I had asked for a schedule reflecting which tenants were supplied with certain services and which provided their own. Take a simple example – a 100,000 sf center with 85,000 sf in the main buildings, and a 15,000 sf single tenant outparcel. The 15,000 sf outparcel is not being billed water and sewer or fire sprinkler maintenance/monitoring. Logic would say that they are being billed directly for water and sewer, and, if the building is sprinklered, they are likely contracting directly. But, if the balance of the center tenants are being billed those charges using a denominator of 100,000 sf (rather than 85,000 sf that may be supplied with the service), the landlord is absorbing those charges on the 15,000 sf.

What does that mean? If the landlord’s expenses for sprinkler monitoring and maintenance is $10,000 per year, the landlord has the ability to collect only $8,500 per year if it is using an incorrect denominator – even though the expense if only for the 85,000 sf building. They are absorbing $1,500. At a 7.5% cap rate, that is $22,500 in value. Now consider the same for another $100,000 in expenses that might be treated the same way – absorbing $15,000 per year translating to $225,000 in value.

You don’t have to have all of the answers. But, you need to be able to ask the right questions.

The trust required between landlords and tenants


I have been in the industry now since 1987. In 30+ years, we have worked with hundreds of great, honest landlords. And, one that wasn’t. Though it hurts to give up business, we did because of our own ethics. We were doing the year end reconciliations for the owner and, at one property, there were sizable credits due the majority of tenants. Somehow, the owner miraculously “remembered” central plant repairs that were never booked and would not only wipe out the credits, but create small amounts due. And, to top it off, the landlord intentionally ignored a most favored nations clause with a statements, “I don’t think that was ever the intent.”

That’s pretty horrendous. You hear the words “fiduciary responsibility.” The landlord has a fiduciary responsibility to the tenant to bill in accordance with the terms of the lease (among many other responsibilities). And in 30+ years, with hundreds of landlords, thousands of properties, hundreds of thousands of leases, we have come across only one dishonest landlord. That’s pretty awesome.

On the same note, when I first got in to the industry, I did tenant sales audits for a few years – probably around 1,000 myself, with the rest of the firm doing around 10,000 in that same time period. Twice, I had truly dishonest tenants. One was a situation where the tenant outright lied about sales – increasing the reported gross sales to the point of paying percentage rent so that the landlord would not exercise a sales related Kickout. The second instance was actually a department store with two locations in a center – one leased and one owned. In those days, recordkeeping was much more manually intensive, and I actually came across a note to intentionally move certain categories from the leased store to the owned store so that they would not hit the breakpoint. (Yes – back then, many department stores had sales high enough to pay percentage rent.) So, two out of perhaps 10,000. Again, I feel like that is pretty awesome.

Yes. There are hundreds of errors made daily, but most often they are honest errors (that most often favor tenants – seriously) because of system/billing limitations or interpretation issues. Perhaps a tenant is permitted to exclude employee sales from reported gross sales, but has only one code for both employee sales and “friends and family” sales. Did they underreport? Yes. Can they change their system to correct this? Likely, but the cost may be much greater than the hassle of dealing with the occasional sales audit, even if they ultimately have to pay for the sales audit because of the underreporting. Perhaps a landlord has a lease with a non-cumulative cap on CAM that has been treated as cumulative. Odds are, the person that set up the reimbursement method may have missed one of the dozens of codes necessary to properly administer that particular lease. In both cases, errors, but nothing intentional.

There is an absolute need for trust between landlords and tenants.

Why this post now? While we show adjustments to landlords that often include credits, all of our work is performed on behalf of landlords – never for tenants. However, a friend has a Crossfit gym and was having trouble with his landlord – a mom and pop tenant in a center owned by a mom and pop landlord. His expenses had not been reconciled for four years. The landlord finally sent a reconciliation. I sat with him as he tried to make sense of what the landlord had sent – a skeleton of a reconciliation. The only expenses that could be verified were real estate taxes, which were overstated on the rec by nearly 25% per year! Unfortunately, I think I may have found a second culprit. Not a client. But, this one experience of just helping a friend that doesn’t look at (or understand) his lease reiterates to me the trust and honesty required between landlords and tenants.

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