Lease administration is the profit link that many retailers are still missing.
The size of a retail chain has nothing to do with how much attention lease administration should get. It doesn’t matter if your company has a full fledged lease administration department or a single person managing lease details. If your company leases any real estate, it is worth exploring how much could be returned to the bottom line.
Every lease is different, but the key principle remains: You may be getting billed for costs that might not be valid based on your lease. Here are tips that can help you catch the unwarranted costs.
Operating expenses, or common area maintenance (CAM), is the catch-all of occupancy expenses. There is the potential of incremental costs trickling down to the CAM pool.
A good lease administrator needs to pay close attention to the definition of the denominator in pro rata share calculations. Is it “leased,” “leasable,” “occupied” or “existing” floor area / building space? These subtle differences can result in significant changes in what you should be paying.
Service levels impact CAM costs as well. If a now vacant tenant had been maintaining its own lot for snow plowing, sweeping and cleaning or lawn maintenance, you may see an increase in costs incurred by the landlord now that the tenant is gone. You have to make sure that the landlord is not penalizing you for their deal with other tenants.
Moreover, the true impact of the expense might only be discovered after a detailed review of CAM billing. Search for items that appear out of place. Some things to monitor include utilities, snow removal, lot sweeping and cleaning, lawn care, waste management, repairs and maintenance, janitorial expenses, insurance, security and administrative costs.
Not only is every lease different, but also the tenant mix, services required, and services provided will vary from site to site. In the cases where your lease does not provide a clear definition of your pro rata share for billings, look for consistency from year to year and in how every tenant is billed.
For example, if you are paying for a shared electric service, you do not want to see other tenants pulled out of the denominator and billed a fixed fee if there is no valid reason to do so.
You also want to look at what is equitable. A pro rata share calculation based on square footage may not be warranted. For example, a restaurant is likely to use more water than the average retailer. And a supermarket is likely to use more electricity and generate more waste.
Another area to explore is your real estate tax bill. If your stores sit on their own parcels, you need to ensure that the assessments are consistent with current market values. And whether you pay for your own parcel or pay a pro rata share, there are some simple questions to ask:
- What items outside of real property taxes are included and excluded?
- How are special assessments handled?
- Has the assessed value changed and, if so, why? Can you appeal?
- Is the landlord passing through additional costs for a review and, if so, are they permitted to do so?
Exercising your rights
Are you doing everything you can to control costs by asserting your co-tenancy rights? Depending upon your lease provisions you may be in a position to negotiate terms that may help you cut costs in troubled times.
Gather the facts to determine whether you are entitled to reduced rent or other remedies based on co-tenancy provisions.
If you are entitled to relief, make a demand to the landlord. Be persistent. Demonstrate that not only is your claim solid, but you will pursue it if the landlord does not provide the requested relief.
Paul Kinney is Executive Director of the National Retail Tenants Association. This article is a brief synopsis of the educational discussions and workshops featured at the NRTA’s 3-day annual conference for lease administration and occupancy management professionals.