When a tenant pays a prorata share of taxes or CAM, there are often defined excluded areas. Most typically, those defined excluded areas are either directly assessed, self-maintaining or insured, or are paying at a rate significantly less than full prorata. By defining those areas as “excluded areas,” the landlord reduces it absorption of CAM or taxes not paid by those areas. And, again, most typically, the contributions made by those defined excluded areas are deducted from the total allocable expenses prior to calculating the specific tenant’s share of CAM or taxes.
Most typically.
However, there are instances where a lease will read “without deducting contributions from excluded areas” (this is most often seen in the northeast part of the country and Florida). This specific language allows the rare “double dip” by the landlord. It happens infrequently but it does happen.
Occasionally, we’ll see the opposite. Where the previous example includes very specific language that does state “without deducting,” the opposite is often an error. A lease will read something to the effect of “after deducting contributions from Majors,” but the lease does not allow the same Majors’ square footage to de excluded from the denominator. This gives opportunity for the rare “double dip” by the tenant.
One not uncommon issue is where a lease requires Majors or some other defined excluded excluded area to be excluded from the denominator, but subject to a cap on how much square footage may be deducted, or to some certain number of tenants that may be considered excluded areas. For example, a lease may read that “the denominator used to allocate CAM shall be the Gross Leasable Area of the center excluding any tenant greater than 15,000 sf. However, in no event shall the denominator ever be less than 200,000 sf.” In this scenario, if the denominator would have been 175,000 sf after deducting all excluded areas, the landlord would still be required to use 200,000 sf as the denominator. But often, the landlord would have deducted the contributions from all tenants that would have otherwise taken then down to 175,000 sf. In that particular (again, not so uncommon) instance, the landlord would have “overdeducted” contributions.
Our very insightful client recognized that, if not considered, the balance of the tenants would be getting a contribution from an anchor for taxes that they, themselves, were not required to pay.
Why this issue this week? We worked on a property this week where a portion of the property was subject to a material tax abatement. Two of the anchor tenants were required to pay taxes based upon what they would have been absent 50% or 75% of the abatement. So, in this instance, the two tenants were paying on taxes greater than total taxes billed. However, the balance of the tenants did not have the same requirement and were being billed based upon actual taxes. Our very insightful client recognized that, if not considered, the balance of the tenants would be getting a contribution from an anchor for taxes that they, themselves, were not required to pay.
While excluded area contributions are usually straightforward, this is clear evidence that they are not always so!
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This is an Interesting article and I love it.
So in this case related to material tax abatement, is this an loss or Profit (Both Tenant and Landlord)?
I am assuming this is
(i) loss for Anchor Tenant and Landlord – Anchor Tenant paying more than what they supposed to and Landlord receives revenue from other Tenants after the deduction of Anchor contribution as well as abatement.
(ii) Profit for remaining Tenants? – They receive both abatement and Anchor contribution deduction.
Also when you said “Double Dip by Tenant”, I assume it means, tenant pays less recovery than they supposed to?
Looking forward for your thoughts on this.
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The intent of the tax abatement was to be a benefit to the landlord. As an example, without the abatement, taxes would have been $250,000. With the abatement, taxes were $100,000. The intent was for the landlord to receive a benefit of $150,000 per year for 10 years. The two anchors negotiated that they would share in the abatement – one would get 50% of the benefit and the other 75%. So, the one would pay on taxes of $100,000 + 50% of $150,000 benefit = $175,000. The other would pay on taxes of $100,000 + 75% of the $150,000 benefit = $137,500.
However, the inline tenant leases did not address the abatement. Therefore, the were billed using the only tax bill the landlord received – for $100,000.
The best case scenario for a landlord would have been to be billed the full taxes – $250,000, with a payment from the municipality back to the landlord for the intended benefit amount of $150,000.
Ultimately, because taxes were lower, they would have been able to get higher minimum/base rent for 10 years, but it will be a shock when the abatement wears off.
And, when we refer to “double dip” for either the landlord or tenant, it means that either a landlord is billing twice for the same expense, or a tenant is somehow receiving twice the benefit. A quick example would be a center with $1,000,000 in expenses and 1,000,000 sf. If every tenant in the center paid based upon leasable area, they would pay $1.00/sf. The landlord would collect $1,000,000. However, let’s say we have three 250,000 sf tenants each paying $.50/sf. In the normal circumstance, the remaining 250,000 sf of tenants would pay based upon $1,000,000 – $375,000 = $625,000; $625,000/250,000 sf = $2.50/sf. So, the landlord would ultimately again collect $1,000,000. (750,000 sf x $.50/sf = $375,000 plus 250,000 sf x $2.50/sf = $625,000). However, in the case of a landlord “double dip” where the lease read “without deducting contributions from excluded areas,” the landlord would have collected $1,375,000 (750,000 x $.50/sf = $375,000 plus 250,000 sf x $4.00/sf ($1,000,000/250,000) = $1,000,000. In the case of a tenant “double dip,” the landlord would have collected $531,250 (750,000 x $.50/sf = $375,000 plus 250,000 sf x $.625/sf ($1,000,000 – $375,000=$625,000; $625,000/1,000,000 sf = $.625/sf) = $156,250.
The permitted/required “double dips” are few and far between, but they happen and can have a material impact on cash flow.
Hope this helps.
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By the way Ramgi, my examples above assume that all of the tenants in the remaining 250,000 sf pay using the same methods. That would likely never be the case. It would more than likely be one or two tenants paying the $4.00/sf or $.625/sf with the remainder at the most typical $2.50/sf.
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