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.