Emerging Issues in Lease Cost Recovery

Transcription

1 Emerging Issues in Lease Cost Recovery January 13, 2010 William F. Devine, Esq. WILLIAMS MULLEN 1700 Dominion Tower 999 Waterside Drive Norfolk, Virginia (757)

2 Introduction Landlords are becoming more creative and aggressive in attempting to increase revenues in face of vacancies and decreasing rental income Retailers should be concerned about increasing Common Area Maintenance, tax, insurance, and other pass-though expenses

3 Introduction Lease pass-through expenses 1. Two ways landlords can overcharge:

4 Introduction Lease pass-through expenses 1. Two ways landlords can overcharge: Including costs in pool of expenses charged to tenants that don t belong

5 Introduction Lease pass-through expenses 1. Two ways landlords can overcharge: Including costs in pool of expenses charged to tenants that don t belong Charging higher share of expenses than tenant is obligated to pay under lease (common area maintenance, taxes, & insurance)

6 Introduction Lease pass-through expenses 1. Two ways landlords can overcharge: Including costs in pool of expenses charged to tenants that don t belong Charging higher share of expenses than tenant is obligated to pay under lease (common area maintenance, taxes, & insurance) 2. The answers lie in the lease

7 Realities Landlords have multiple leases in every shopping center

8 Realities Landlords have multiple leases in every shopping center Contain different definitions & provisions:

9 Realities Landlords have multiple leases in every shopping center Contain different definitions & provisions: Common Area

10 Realities Landlords have multiple leases in every shopping center Contain different definitions & provisions: Common Area Allowable expenses

11 Realities Landlords have multiple leases in every shopping center Contain different definitions & provisions: Common Area Allowable expenses Exclusions

12 Realities Landlords have multiple leases in every shopping center Contain different definitions & provisions: Common Area Allowable expenses Exclusions Caps

13 Realities Landlords have multiple leases in every shopping center Contain different definitions & provisions: Common Area Allowable expenses Exclusions Caps Administrative fees

14 Realities Landlords have multiple leases in every shopping center Contain different definitions & provisions: Common Area Allowable expenses Exclusions Caps Administrative fees Manner of calculating the tenant s share

15 Realities Landlords have multiple leases in every shopping center Contain different definitions & provisions: Common Area Allowable expenses Exclusions Caps Administrative fees Manner of calculating the tenant s share Calculating pass-through expenses separately for every tenant under each lease can be a hassle for landlords

16 Realities Landlords facing increasing financial pressures

17 Realities Landlords facing increasing financial pressures Vacancies Tenant bankruptcies Difficult retail market Shrinking rents Loan covenants & obligations Increasing expenses

18 Realities Landlords facing increasing financial pressures Vacancies Tenant bankruptcies Difficult retail market Shrinking rents Loan covenants & obligations Increasing expenses Incentive to use lease pass-throughs as revenue source

19 Realities Landlords know retailers face own pressures Hundreds or thousands of sites Pared-down expenses Fewer people with increased workloads Hundreds or thousands of reconciliations to process Tight deadlines for disputing charges

20 Landlords are human Realities Honest landlords make mistakes Occasional unscrupulous landlord may use creative bookkeeping, recognizing may get through review process unscathed

21 Common Issues In Overcharges 1. The Denominator Issue 2. Importance of Restricting Expenses to Common Area vs. Shopping Center 3. Inclusion of Management Fees in CAM Pool 4. Tax Pass-Throughs

22 Common Issues In Overcharges 1. The Denominator Issue 2. Importance of Restricting Expenses to Common Area vs. Shopping Center 3. Inclusion of Management Fees in CAM Pool 4. Tax Pass-Throughs

23 Common Issues In Overcharges 1. The Denominator Issue 2. Importance of Restricting Expenses to Common Area vs. Shopping Center 3. Inclusion of Management Fees in CAM Pool 4. Tax Pass-Throughs

24 Common Issues In Overcharges 1. The Denominator Issue 2. Importance of Restricting Expenses to Common Area vs. Shopping Center 3. Inclusion of Management Fees in CAM Pool 4. Tax Pass-Throughs

25 The Denominator Issue Standard provision defines tenant s share as fraction Numerator Tenant s square footage Rarely an issue Denominator Some measure of the size of the shopping center Major tenants are often excluded when calculating tenant s share Pay flat CAM or responsible for own CAM expenses LL s Argument: would be inequitable to include entire GLA of shopping center when tenant does not contribute proportionally to CAM

26 The Denominator Issue Courts look to the lease to determine what should be included in the denominator Recent case: Dollar Tree Stores, Inc. v. Norcor Bolingbrook Assocs., LLC Federal court awarded summary judgment in favor of Dollar Tree Found landlord improperly excluded 114,000 sf Wal-Mart from denom. Increased Dollar Tree s share of CAM from 5.8% to 14.9% Increased occupancy expenses by $40,000/yr in 10,800 sf store Lease defined Dollar Tree s share as ratio of square feet within the Premises to the gross leasable area within all of the existing buildings in the Shopping Center as of the date of the billing Court held provision required inclusion of Wal-Mart in denominator In most jurisdictions, absent an ambiguity, courts will enforce lease as written regardless of whether more or less favorable position could have been negotiated

27 The Denominator Issue Advice: 1. Define percentage or at least numerator and denominator in lease

28 The Denominator Issue Advice: 1. Define percentage or at least numerator and denominator in lease 2. Include tight definitions of Shopping Center

29 The Denominator Issue Advice: 1. Define percentage or at least numerator and denominator in lease 2. Include tight definitions of Shopping Center 3. Specifically identify any negotiated exclusions from denominator

30 The Denominator Issue Advice: 1. Define percentage or at least numerator and denominator in lease 2. Include tight definitions of Shopping Center 3. Specifically identify any negotiated exclusions from denominator 4. Pay particular attention to treatment of big boxes or anchors in your shopping centers

31 The Denominator Issue Advice: 1. Define percentage or at least numerator and denominator in lease 2. Include tight definitions of Shopping Center 3. Specifically identify any negotiated exclusions from denominator 4. Pay particular attention to treatment of big boxes or anchors in your shopping centers 5. Include share of pass-through expenses in lease abstracts used by lease administration or accounting in processing annual reconciliations

32 Common Area vs. Shopping Center Essential to confine CAM to expenses related to operation, maintenance, and repair of common areas Lease defines what can be included in CAM Pool Some leases allow landlord to include expenses for operating, maintaining, and repairing shopping center Substantial expenses unrelated to common area Transferring operational expenses from landlord to tenant

33 Common Area vs. Shopping Center Sheplers, Inc. v. Kabuto International (Nevada) Corp. Lease limited common area expenses to the operating, managing, equipping, lighting, repairing, replacing, and maintaining the common areas Kansas federal court held certain management fees were improperly charged as CAM costs

34 Common Area vs. Shopping Center Advice: 1. Include tight definitions of common area in leases

35 Common Area vs. Shopping Center Advice: 1. Include tight definitions of common area in leases 2. Define parties responsibilities for maintenance and repair of building and leased space

36 Common Area vs. Shopping Center Advice: 1. Include tight definitions of common area in leases 2. Define parties responsibilities for maintenance and repair of building and leased space 3. Ensure CAM charges are limited to expenses of operating, maintaining, and repairing common areas

37 Common Area vs. Shopping Center Advice: 1. Include tight definitions of common area in leases 2. Define parties responsibilities for maintenance and repair of building and leased space 3. Ensure CAM charges are limited to expenses of operating, maintaining, and repairing common areas 4. Review charges carefully to ensure limited to common areas & contest charges related to buildings or individual tenant spaces

38 Management Fees in CAM Pool Landlords often include management fees in CAM pool regardless of lease language operating, maintaining, repairing common areas Managing? Administrative fee already included?

39 Management Fees in CAM Pool Fees often calculated as percentage of total revenues derived from shopping center Hidden dangers ( double-dipping ): Includes CAM receipts Can have 15% administrative fee added Landlords often use captive or related management firms to provide the services

40 Advice: Management Fees in CAM Pool 1. Exclude management fees from CAM in lease negotiations in possible

41 Management Fees in CAM Pool Advice: 1. Exclude management fees from CAM in lease negotiations in possible 2. If included, management fees should only be for services related to common areas See Sheplars, Inc.

42 Management Fees in CAM Pool Advice: 1. Exclude management fees from CAM in lease negotiations in possible 2. If included, management fees should only be for services related to common areas See Sheplars, Inc. 3. Require detailed breakdowns of CAM expenses in lease

43 Management Fees in CAM Pool Advice: 1. Exclude management fees from CAM in lease negotiations in possible 2. If included, management fees should only be for services related to common areas See Sheplars, Inc. 3. Require detailed breakdowns of CAM expenses in lease 4. Landlord will typically have burden of proving expenses are related to CAM where landlord has exclusive control of records

44 Tax Pass-Throughs What charges can be included? How is tenant s share calculated? These issues will be answered by the lease

45 Tax Pass-Throughs Landlords want to include as many expenses as possible in taxes to pass charges through to tenants Examples: Business license fees/taxes Income taxes Gross receipts taxes Consultant s fees (analyzing and contesting charges)

46 Tax Pass-Throughs Landlords will try to exclude certain parcels when passing through taxes to in-line stores Big box space typically assessed at lower per foot value than in-line stores Excluding big box space may result in higher tax passthroughs to in-line tenants

47 Tax Pass-Throughs Advice: 1. Address these issues in lease negotiation

48 Tax Pass-Throughs Advice: 1. Address these issues in lease negotiation 2. Clearly define what charges are included and excluded

49 Tax Pass-Throughs Advice: 1. Address these issues in lease negotiation 2. Clearly define what charges are included and excluded 3. Clearly define what tax parcels are included

50 Tax Pass-Throughs Advice: 1. Address these issues in lease negotiation 2. Clearly define what charges are included and excluded 3. Clearly define what tax parcels are included 4. Compare charges to publicly available information about taxes

51 Tax Pass-Throughs Advice: 1. Address these issues in lease negotiation 2. Clearly define what charges are included and excluded 3. Clearly define what tax parcels are included 4. Compare charges to publicly available information about taxes 5. Audit tax charges

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