Has this happened to you: after a few years into a lease, your successful store ends up with much higher than expected occupancy costs?
The costs (rents and NNN provisions) were hard fought in negotiations, and the tenant ended up with a good solid lease. The sales are great.
Everyone should be happy, but the store is netting less than expected.
It appears that the problem is the occupancy expenses which are significantly higher than expected. The center was not reassessed and the landlord's CAM, and insurance costs have not unreasonably increased. We know this because the LOI included a request for the center's prior 2 years NNN reconciliations.
No one on the tenant's side has an explanation. The proforma just didn't get it right. Or is there another explanation?
In my experience, there are several potential explanations. With the higher sales, the tenant hit the breakpoint early and began paying percentage rent. Unfortunately, the breakpoint was not calculated correctly, nor did the tenant taking advantage of properly reporting sales.
All those exempt sales, the credit card processing and bank fees, uncollectable debt, gift card sales, employee sales, were included in the reported sales. The incorrect sales represent a potential increase in %rent expense of near 10%, not to mention the wrong calculation of the breakpoint. Although the landlord's expenses were within reason, the Tenant never verified the NNN reconciliation against the lease.
The square footage was checked, but that's it. Upon audit it was discovered that the landlord had included several expenses which were not supported by the lease.
The landlord broke several expenses into "pools," also not supported by the lease, which increased tenant's share of the expense. The landlord adjusted the center's GLA based on vacancies, again, not supported by the lease and increasing the tenant's share.
The landlord had types of insurance coverage that the tenant had negotiated out of the lease. Lastly, the admin fee was 15%, rather than the agreed upon 10%, was charged on insurance, which along with tax was exempt.
None of these mistakes were caught in house, and they were symptomatic of the tenant's other locations as well. The only person for whom this hypothetical story had a happy ending was the auditor. His contingency was the industry standard of 40%.These mistakes, resulting in way too much wasted money and time, were completely avoidable.
When I start working with a new client, in order to assess their needs, I ask, "What does you lease say about your CAM bill?" The response is almost always the same. "It says I have to pay it."
Sometimes they add "it comes in April," or "within 30 days," but there is rarely any depth to the answer. It doesn't matter if it's a corporation with multiple locations, or franchisee with one store, the right answer is that your lease tells you EVERYTHING you need to know about your CAM bill, and how to protect yourself or your company from paying too much.
The lease is a word problem--the answer is how much of your money you get to keep.