From time to time DDIFO is pleased to present Guest Commentary from valued contributors. Guest commentaries feature the views and opinions of the contributor and are not necessarily the opinions of DDIFO and it’s Board of Directors. The following is an article written and submitted by Paul Kinney, Paul is the Executive Director of the National Retail Tenants Association, responsible for the day-to-day management of the association and Co-Chair of the Curriculum Committee. He is co-founder of the NRTA and has served as President. Prior to his role of Executive Director he was employed by Friendly Ice Cream Corporation as Director of Real Estate Services with more than twenty years experience in real estate lease administration. This article is a brief synopsis of the educational discussions and workshops featured at the NRTA’s 3-day annual conference for lease administration and occupancy management professionals.  For more information on the NRTA conference go to www.retailtenants.org 

The size of your chain has nothing to do with how much attention the lease administration should get. It doesn’t matter if your company has a full fledge lease administration department, a single staff person managing lease details, or even yourself.  If your company leases any real estate, (one or one thousand units)  ask yourself how much money could be returned to your bottom line?

You may be being billed for costs that might not be valid based on the definitions in your lease. Every lease is different, so take the time to understand the specifics of your lease before going down this path.  Here are five tips that can help your staff catch the unwarranted costs that may creep into your occupancy costs.

OPERATING EXPENSES /COMMON AREA MAINTENANCE:

Operating Expense or Common Area Maintenance (“CAM”), is the “catch all” of occupancy expenses. Look for the potential of incremental costs trickling down to the CAM pool.  Pay close attention to the definition of the denominator in pro rata share calculations.  Is it “leased”, “leasable”, “occupied” or “existing” floor area / building space?  These subtle differences can result in significant differences in what you should be paying as your pro rata share.  Ask the landlord to provide support for their denominator.  Remember that every square foot counts, so be sure to understand what is included and what is excluded.

Service levels impact CAM costs. If a now vacant tenant had been maintaining its own lot for snow plowing, sweeping and cleaning or lawn maintenance, among other things, you may see an increase in costs incurred by the landlord.  This is where you need to understand your lease and the definition of common areas.  Again, you are looking for equity in your lease; you just have to make sure that the landlord is not penalizing you for their deal with other tenants.

The true impact of the expense is not always evident and might only be discovered after a detailed review of the CAM billing and its supporting documentation.  Pay close attention to the definition of the denominator in the pro rata share calculation.  Search for items that appear out of place and costs that would not have been incurred had a space(s) not gone empty during the year.  Some things to look for include:

  • Utilities
  • Snow Removal, Lot Sweeping and Cleaning and Lawn Care
  • Trash, Refuse and Garbage
  • Repairs and Maintenance or Janitorial and Cleaning
  • Security Costs
  • Roof and Structure repairs
  • Administrative Costs
  • Leasing Expenses Management Fees

REAL ESTATE TAXES:

There are a few things to look for as you begin paying your real estate tax bills to counties, cities, and other taxing authorities.

If your stores sit on their own parcel, you need to keep an eye on the assessment levied against your real estate.  Is the assessed value in line with the market value?   Whether you pay for your own parcel or you pay a pro rata share of the greater tax bill, ask some simple questions as you review the lease and the real estate tax billing:

1.What items outside of taxes on real property are included and excluded?
2.Review special assessments on the billing and in your lease.
3.Has the assessed value changed and if so, why?  What rights do you have as a tenant in appealing the assessment?
4.Is the landlord passing through additional costs for a review of the assessment, and if so, are they permitted to do so?
INSURANCE EXPENSES
Look at the rate per square foot in this year’s billing versus the prior billing.  If you see a significant increase, start asking questions.

Understand the area that is covered by the landlord’s billing and compare that against the definition of pro rata share of insurance in your lease.  Is the landlord under-allocating the cost?  In other words, are they including every tenant and/or storeroom (even if vacant) that should be included in the denominator?

If your lease allows, require the landlord to provide proof of payment (to the insurance carrier) and proof of coverage in the form of an insurance certificate.

Was the landlord covered for the period they billed to you (assuming it is billed in arrears); also ensure that you continue to be covered by requesting a current insurance certificate annually.

UTILITIES AND SHARED SERVICES:

Pay attention to utility billings and shared services such as refuse removal.  Not only is every lease different, but also the tenant mix, services required, and services provided will vary from site to site.  In the cases where your lease does not provide a clear definition of your pro rata share for these types of billings, then look for consistency- from year to year, and in how the landlord is billing every tenant.  For example, if you are paying for a shared electric service, you do not want to see other tenants pulled out of the denominator (assuming pro rata on square footage) and billed a fixed fee if there is no valid reason for the landlord to do so.

You also want to look at what is equitable to all of the tenants in the center.  Remembering that these are shared services, a pro rata share calculation based on square footage may not be warranted.  For example, a restaurant is likely to use more water than the average retailer.  A full service grocery store or supermarket is likely to use more electricity and generate more waste than other retailers.  Remember that you are looking for equity in your lease to make sure that the landlord is not penalizing you for their deal with the other tenants.

SHAVING COST THROUGH YOUR CO-TENANCY RIGHTS:

Are you doing everything you can to control costs by asserting your co-tenancy rights.  Depending upon your lease provisions you may be in a position to negotiate terms that may help you cut costs in troubled times.

Determine whether the co-tenancy conditions in your leases are satisfied.  Gather the facts to determine whether you are entitled to reduced rent or other remedies based on co-tenancy provisions.

If you are entitled to relief, make a demand to the landlord.  Be persistent. Demonstrate that not only is your claim solid, but you will pursue it if the landlords does not provide the requested relief.

Finally, as a valued tenant, this is an ideal time to negotiate better co-tenancy terms in your leases for the future.