by Rick Burke; www.LeaseAdminSolutions.com. Reprinted from Tenants In-Common, November 2016 issue.
For obvious reasons, there is a direct relationship with the increase in tenant’s square footage and the amount of backup received from the landlord to support its CAM, Real Estate Tax and Insurance costs. Even if the tenant gets the backup, the request for overcharge reimbursement often gets ignored or flat out rejected without any logical reason by the landlord. Litigation is an option, and the discovery phase will provide the needed backup. However, it is costly and most times not worth it for the tenant. So, tenants often move on, paying in protest or just paying whatever the landlord bills. Unlike the larger tenants and anchors, the smaller square footage tenants often end up paying the brunt of the CAM cost in the shopping centers and malls.
However, all is not lost. Smaller tenants need to modify their review process to include the possibility of not receiving the requested backup from the landlord.Tenants with this difficulty need to focus on areas that are not landlord dependent and are more black and white with regards to the lease. This is a lesser in depth review that we call Plan B. This article looks at some of the common and high level mistakes made by landlords that are easy to spot and easier to substantiate without depending on the backup from the landlord.
Escrows and Math Footing:
The review should start with the question: Should the tenant be getting an invoice and is the landlord accounting for all of the escrow payments made by tenant? Often escrow payments are incorrect due to the timing of the payments, the sale of the shopping center, or the misapplied payments by the landlord. The tenant should also review the invoice to make sure the math adds up and foots.
Reviewing a landlord’s statement should always include verifying the calculation of a partial year. Leases with a partial year that include Caps, Base Years or CPI adjustment are often subject to errors by the landlord. In addition, real estate taxes are often calculated incorrectly in a partial year. Some real estate taxes are billed by the counties or towns in arrears verses in advance, thus the tenant will be paying for real estate taxes for a period prior to when the lease commenced.
Caps and CPI Calculations:
One of the most common areas where mistakes are made is in the calculation of Caps and CPI calculations. With Caps, they come in many different types such as Not to Exceed (NTE), Cumulative, Year over Year’s Actual Cost, Controllable and Non-Controllable Cost etc. Landlords often calculate the Cap incorrectly as compared to the language in the lease. The landlord may not base the Cap on a Not-to-Exceed basis and charge the full percentage. We often see the Cap based on the prior year Cap cost instead of the actual cost. If based on actual cost, the Cap will be reduced for the preceding year if the actual cost is less than the Cap amount for the current year, potentially giving the tenant a savings in the preceding year. To the landlord’s credit, they may have many tenants with many different types of caps, so an error is bound to happen. The same goes for Consumer Price Index (CPI), where there is often a mistake in the calculation or in the table used.
Administrative and Management Fees:
The inclusion of management fees or administrative fees when the lease does not allow for these fees is a common billing mistake. It is important to read your lease and verify if these fees are allowed. For an example, if an administrative fee is allowed, should there be actual administrative cost in addition to the fee? Should the administration fee be applied to the administrative cost? Should management payroll be included if there is a management fee and should the management fee be applied to the management cost? Do expenses such as insurance and real estate taxes include a management or administrative fee? Remember a fee differs from a cost!
Tenants need to verify their square footage as well as the square footage of the shopping center beginning with the first year of the lease term. Although the landlord may not be helpful and give you an accurate tenant roster, there are ways to verify square footage without the landlord’s help. Using Google to search for information is one way, going to the landlord’s website is another. The tax assessor often has square footages but they will vary from actual square footage due to the inclusion of non- leasable square footage. Google Earth Professional also offers a measuring tool that will get you close to the actual square footage of a building. It is also very important to understand if the pro-rata share is calculated on gross leasable area (GLA) or leased and occupied area (GLOA). The latter does not include the vacancies in the denominator, thus increasing the tenant’s pro-rata share of the cost.
The age old problem of the landlord deducting contributions starts with the word, “contributions.” It begs the question; how much is a contribution? The word Contribution is a vague term that could mean one dollar or one million dollars. Some landlords take advantage of language by deducting a very low cost per square foot, if any, as a contribution, leaving the rest of the tenants burdened with the extra cost. Although, you will very rarely get the landlord to send you the support for the contributions, you should verify in the lease if major or anchor contributions are allowed to be deducted. Even if a contribution is allowed per the lease, there may be some inconsistencies in how it is calculated that can be challenged. For example, contribution may be applied incorrectly with caps that have a controllable and uncontrollable component. The landlord may apply the entire contribution deduction to the controllable side when actual cost is way above the cap creating a situation where tenant does not benefit from the contribution deduction. The contribution should be applied to controllable and non- controllable items at the same percentage as the tenant’s cost on its statement.
Obvious Lease Exclusions:
A tenant should create a year to year analysis by account to see if the cost has increased from one year to the next. This comparison exercise can identify obvious items that should be excluded because they are not allowed per the lease. Items such as capital, reserves, administrative cost, roof related or building expenses or just plain Non-CAM can be disallowed if identified on the statement. Disallowing these items and letting the landlord know why you are disallowing should get a response from the landlord if nothing else. Basically, the tenant will be putting the onus on the landlord to support these expenses included in the statement.
Real Estate Taxes:
The review of real estate taxes has long been the review that needs very little from landlord. It also allows the reviewer to better understand the physical aspects of the shopping center. After understanding the location using Google Earth, along with the definition of the shopping center in the lease, the reviewer can confirm the real estate tax parcels that should be included in its billing. Many tax assessor websites also have Geographic Information System Mapping (GIS) that can show the actual parcel breakdown of the shopping center, thus identifying parcels that may not be part of the center or may be undeveloped land being held for future use by the landlord. Other possible overcharges such as not reimbursing abatements, special assessments related to construction of the center, and late fees, may also be identified and disallowed in this process.
No matter how you look at it, being a smaller square footage tenant has its challenges when it comes to reviewing occupancy cost. The leases are more restrictive, the landlords are less attentive and there is simply not enough time in a day. However, having a review process that is not dependent on the landlord as a Plan B is a better alternative than giving up.