Malls · Office Properties · Retail leases · Shopping Center · Uncategorized

How many expense pools are required?

Over the years, we have worked on 150+ tenant regional malls where the sellesr had been using 3-4 expense pools per prorata expense category, and we have also worked on 20 tenant open air centers where the seller had been using 20 different expense pools.

What’s right?

As new variables are introduced into leases, the number of pools required grows. For example, your standard lease requires the tenant to pay a prorata share of taxes based upon the leased area of the shopping center excluding tenants greater than 15,000 sf. If every tenant comes in and agrees to that methodology, you may have one pool. But another tenant comes in and changes the definition to 20,000 sf, and yet another, 25,000 sf. All other things being equal, you now have three pools. Other tenants come in, and rather than leased, they negotiate leasable. With no other variables, you could possibly have 3 additional pools, for a total of 6 (leased less 15k, leased less 20k, leased less 25k, leasable less 15k, leasable less 20k, leasable less 25k). Part of it will also be determined by how you have set up your property management software and you cash flow analysis software. Now suppose you develop an outparcel and you want that outparcel to be excluded, so you change your standard lease to leased less tenants greater than 15,000 sf and outparcels. All of the sudden, there are the possibility of 6 more. Then you have tenants request (and your leasing people agree to) minimum occupancies (ex. Leased less tenants > 15k sf, with the denominator never less than 80% of the leasable area excluding tenants > 15k). The number of possibilities grew again. Consider that the property is sold and the new owner’s standard lease includes personal property taxes in the tax definition whereas the original lease did not.

Seriously, as variables are added, the number of pools grows. We have worked on properties that on the day they have opened, there have been nearly the number of pools as there are tenants.

Why this post this week? Working on a regional mall this week with about 140 tenants, I had just reviewed the owners set up of taxes. There were about 12 methods while about 20/21 were needed. Then I got to CAM. They had nearly 40 methods set up for CAM, many with changes in the inclusions or exclusions from expenses (before even considering changes in methodologies). I settled in for the long haul, but soon found that all but one tenant was on fixed CAM. Still not sure why they had not cleaned up the CAM pools.

So, how many expense pools are required? Unfortunately, as many as necessary. Trying to use too few pools to ease the administrative burden will lead to numerous errors, which can often lead to money left on the table. No one wants that!

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