You may be thinking this is clickbait. It’s not. This past week, we had a truly “throwaway” lease clause that had cost the owner more than $10m in value on the property. Not one clause in every lease at the property, but one clause in one lease. The clause –

“The tenant may offset percentage rent, if any, against real estate taxes.”

That “if any” is what made it a throwaway clause. Percentage rent, if any… So, the landlord was not counting on any percentage rent.

The quick facts – the anchor pays a full prorata share of real estate taxes. Their share? Over $800,000. Tenant pays stepped percentage rent (ex. 2% over $17m up to $20m; 1.50% from $20m-$25m). The lease commenced in the 70s. Tenant’s sales were running nearly $50m. Percentage rent (remember “if any”) would be north of $600k. Not $600. Not $60,000. But north of $600,000!!!

So, the tenant would be paying over $800k in taxes and over $600k in percentage rent. But, this throwaway clause allowed them to offset (recapture) percentage rent against taxes. Cap that $600k (that you lose on an annual basis) and you get over $10m in value (on this type of property at a 6% cap).

We might not have given up that much in value if the balance of the leases in the property excluded the anchor from the denominator AND had recapture language in the leases. It would read something to the effect of:

“Majors (premises greater than 50,000 sf) shall be excluded from the denominator when calculating Tenant’s Prorata Share provided that landlord shall deduct contributions (net of any permitted recaptures) from any excluded area prior to calculating Tenant’s Share.”

In that case, instead of deducting an $800k contribution from the excluded area, we would have deducted a $200k contribution ($800k calculated less $600k recapture). That would have increased the inline tenants’ shares, and we would have been able to pick up much of the $600k (we wouldn’t have gotten it all because more sophisticated tenants would have negotiated out the recapture language.

But, one clause. One lease. $10,000,000 in value.

Back when I was I was 7, in 1972, I thought I was going to get “rich.” There were news stories all the time about the US Mint making a mistake and accidentally double stamping some 1972 Lincoln Pennies. There was a slight shadow on the pennies where you could see this “double die.” I honestly forget what I was told they were worth at the time – I think $55. For the next few years, I searched and searched. Friends and relatives let me search their coin jars. The deal was, if I took a penny, I had to replace it. This applied to nickels, dimes and quarters. I never did find a 1972 double die (likely because it was too subtle for me to find). But, in the end, I had a complete set of Lincoln pennies, most Indian Head pennies, most Jefferson and Buffalo nickels, and so many pre-1964 (silver) dimes and quarters. I found value.

Recapture provisions are not nearly as rare as 1972 double dies. We’ll come across 25-30 per year. But, honestly, if you get to know the leases and lease language in your portfolio, you’ll find value.