commercial real estate · Malls · Retail leases · Shopping Center · Uncategorized

Be explicit – even fixed CAM can be tricky

There’s no doubt that prorata CAM, tax and insurance calculations can be tricky. You have to make sure the shopping center definition is correct, the expenses are correct, the method of calculating the leasable area is correct, the method of calculating vacancies is correct, the definition of excluded area is correct, the treatment of excluded area contributions is correct… Actually, as I write this, I am thinking of the dozens of other factors that go in to prorata calculations. So, the majority of leases on the mall side of our industry are fixed CAM calculations, and there is a material portion of leases in open air centers that use fixed CAM as well. It eliminates the complexity of administering CAM.

So, fixed CAM is simple, straightforward and can’t have any calculation issues, correct? We know that is not the case from previous blogs. One major culprit – the definition of “years,” and specifically when the first increase is going to be applied.

This past week, we were working on a beautiful mixed use property that, unfortunately, had opened in the middle of the great recession. It is doing well today, but, because of the conditions that existed at the time, could not be fully developed with its original timeframe. While the project opened with numerous freestanding restaurants, a few have come after the fact and are still being completed today. The existing outparcel tenants were all on a fixed CAM, all with comparable rates and comparable increase methods.

In 2014, one new lease was being negotiated. The then-current landlord did a great job being upfront with this future tenant of sharing the fixed CAM rate and increase method – $8.00/sf for 2014 with 3% increases annually. The lease was executed. The tenant opened. The tenant was billed its $8.00/sf with 3% annual increases – just the same as every other freestanding restaurant. Not really!

While the lease was being negotiated in 2014, it was finally executed in 2015. Ultimately, the tenant opened in November 2016. If you have followed these blogs for a while, I am hoping you can see where this is going. On the day the tenant opened, every other freestanding restaurant was at $8.49/sf. The tenant was at $8.00/sf. On 1/1/17, the other tenants bumped to $8.74/sf. The tenant stayed at $8.00/sf until 12/1/17.

$.72/sf per year; $5,400 in annual cash flow; $77,000 in value

Knowing the extended approval and development period existed, the lease could have addressed that the rate was $8.00/sf for 2014 (which it did), increasing every January 1, with the tenant’s rate at commencement to be the then-current rate. And, as addressed in the previous sentence, that January 1 reference is critical. As it was written, “annually” was not defined. Ultimately, because of the poor wording of the lease, the landlord has lost, on this particular tenant, $.72/sf (increasing by 3% per year). That $.72/sf is 2 years, 11 months’ worth of increases. FOR THE ENTIRE TERM!!!!

At 7,500 sf, that is $5,400 per year! At a 7% cap rate, that is $77,000 in value! This because the lease language did not match the former landlord’s intent.

Be explicit with your lease language. It absolutely translates into the property’s value!

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