Squeeze another 353 sf out of that space!

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!

Distorted sales and sales audits

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

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.

The “backdoored” exclusive


Exclusives, kickouts and cotenancies are typically the big three non-financial covenants that have to be confirmed on an acquisition because, along with the cash flow of the property, they have such an impact on value.

More often than not, these provisions are fairly obvious in a lease, But, sometimes they are buried. This past week, we were working on a property that a new client had acquired. As you will sometimes see in leases, most of the standard leases at this property contained the exhaustive list of all restrictions and exclusives for all tenants at the property. In one particular lease, the tenant did not have an exclusive contained within the body of the lease. Had there not been a line by line review of the exhaustive exhibit containing all of the exclusives for the property, the tenant’s own exclusive might have been missed. It was a “backdoor” exclusive – not addressed in the body of the but added, not by special stipulation, but by inclusion in that exhibit.

Sneaky? Yes. But the tenant got its exclusive. Fortunately, while our client was not previously aware of the exclusive, they had not unintentionally violated it.

There’s another clause you will sometimes see in a lease – “heading and captions.” In essence, it says that the headings and captions within the lease may not always properly address what’s in the clause. It’s there for a reason. There’s always something hidden in leases!

The physical embodiment of the last real estate recession is now gone … and it is kind of sad.


(A little non-lease administration but still real estate related blog for this week)

Having been in retail real estate since 1987, I have seen my shares of ups and downs. However, in the early through mid 2000s, transaction volumes were through the roof, and I had forgotten the rule about what goes up also goes down. But, late 2007 to late 2009 was as rough as I had ever experienced. Having lived as if the party of the early 2000s would continue forever, it was time to batten down the hatches.

Quickly becoming a Dave Ramsey fan, the Lexus and BMW gave way to a fairly nice used Hyundai Veracruz for my wife, and, a 1998 Jeep Cherokee for me (which my family somewhat affectionately (not really!) referred to as “the steaming metal box”). Steaming because the A/C worked intermittently, then not at all. Metal box because it started as mostly slate blue with a slight Cherokee acidy paint fade to a most acidy paint fade with some remaining vestiges of blue.

It is a humbling but powerful learning experience to move from a BMW to a used Jeep with 160k miles on it at purchase. In an area where teenagers drive cars as nice (or nicer) than the parents, it was almost a forced sociological experiment. You no longer even got the steering wheel hand wave in the neighborhood.

By the time the industry started to recover in 2010, I had embraced that Jeep and wasn’t about to give it up. I became a fan of not worrying about a new scratch. It was actually liberating. In 2014, I finally caved and bought a new car. But, that physical embodiment of the recession – that steaming metal box – had become a family member. It was not going anywhere.

My son absolutely loved that car and proudly drove it to a high school with a fair share of Mercedes, and BMWs, and Maseratis and Range Rovers. Ultimately, likely as a joke, his cross country team voted his car as favorite vehicle during their goofy year end awards. He loved the designation.

At the start of his sophomore year of college last fall, we drove the Jeep the 700+ miles from Atlanta to South Bend. Well, not all of the way. It decided it need some work in Indianapolis, so made it about a week later. And, it served him well, starting without a hitch after sitting for over a month during winter break on many sub zero days.

But, it came to its final resting place on the drive home yesterday in Austin, Indiana, just 70 miles shy of 240,000 miles, as the transmission gave way and we, fortunately, were able to glide about ¾ of a mile off of I-65 around corners and even up a slight hill into a parking space in a Fuel Mart gas station.

With great fondness, I say goodbye to that symbol of the Great Recession. I will never forget the lessons learned. The next time you see an old Cherokee on the road, use it to remind yourself that commercial real estate is cyclical, and that you need to plan for both good and bad times.

Are your tenants still contributing to marketing?


I got in to the industry in 1987. At that time, there were still plenty of 10-30 year old leases still in effect. So many of those leases had requirements for tenants to participate in a merchants’ association (usually at some initial nominal rate with CPI increases). The tenants would control how those funds were used, with the landlord having representation in the association and often a requirement that the landlord contributed a 20-30% match of the funds.

But, in the early 80s, landlords realized that they could do a better job marketing their properties than a group of tenants could, and the weekend petting zoos and merchants’ associations started to fade away in favor of marketing funds controlled by the landlords.

By the early to mid 90s, in addition to marketing funds, many leases also started to have media funds. It was not uncommon for an inline tenant to be paying $6.00/sf or more in marketing and media charges.

(There was also a period where many leases required tenant to advertise in center-sponsored advertising 3-8 times per year with ad requirements that ran 1/8-1 page per program, but most of those were converted to media funds by amendments and letter agreements as the landlord wanted to control the spending.)

However, as the enclosed side of our industry started the steady march to fixed CAM in the early 2000s, we almost immediately saw media funds go away, and a slow fading of marketing funds.

Today, it is a rare occurrence to see a marketing fund charge in a new lease. You may still see a reference to a merchants’ association in an open air lease with a requirement that the tenant participate if an association is formed – but that is almost never invoked.

What that means is that landlords now almost exclusively fund the marketing programs at their properties.

So many facets of our industry are cyclical. Fixed CAM to prorata and back to fixed. Open air centers becoming enclosed and now being de-malled. Supermarkets and health clubs in malls, then being specifically restricted against being in centers, and now being courted back. I wonder if we will ever see tenants contributing to marketing programs as part of leases again.

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