How retailers can recoup funds with CAM Audits

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How retailers can recoup funds with CAM Audits

09/21/2017

The continued popularity and development of town centers and lifestyle centers have made it clear that retailers can no longer go it alone. They must co-exist in a symbiotic live-work-play environment, and that means they must also co-exist with the different demands and cost structures of residential and office spaces.



It is more important than ever, therefore, for retailers to evaluate their leases in an effort to plan and implement strategies that will make the most economic sense for their individual store locations. In the past, many of the larger retailers have relied on standard templates for CAM language. They deployed them automatically across their portfolios with minor variations for specific shopping centers. But today, the cookie cutter approach is out and retail leases are being negotiated with more lease caps, fixed-fee language, and base years — strategies that have typically been the sole province of office leasing.



As more centers are repositioned and leased to unconventional tenants that function outside the retail arena, it is critical that retail tenants aggressively review their CAM expense charges to identify potential instances of overbilling. Below are two particular areas of concern in performing common area maintenance audits for mixed-use properties:



Allocation of Expenses

The allocation of costs among the various tenants and cost pools are both significant concerns for tenants at mixed-use properties. As such, it is critical that tenants have an understanding of and insight into the methodology used and the manner in which costs are allocated between the different cost pools of the property. If the property has changed its tenant mix from retail to a combination of retail and office tenants, there may be varied reimbursement agreements, such as office tenants that only pay increases over base year expenses and retailers that pay a net share of expenses.



Landlords may be incentivized to allocate different percentages to different cost centers based on the individual reimbursement methodologies in the respective leases. These types of overcharges can be difficult to discover without the benefit of a rigorous review of the invoices and contracts. It is usually a red flag when the tenant only sees an invoice for an allocated amount and is not provided the details of the methodology supporting the allocation.



Once there is a base-line understanding, the allocations should remain relatively constant, absent significant changes at the center regarding operating costs and required maintenance. To address this potential area of concern, some landlords are now writing leases and amendments that convert their retail tenants to base year leases, or, in many cases, to fixed reimbursements.



Real Estate Taxes

Many retailers use a segmented process to review real estate taxes and CAM billings, but today a more critical review is warranted. Big changes in tenant mixes mean bigger potential for errors in the calculation and allocation of real estate taxes that are billed to office, retail, and residential unit owners.



Increasingly, landlords have converted portions of retail centers to alternative uses that may further affect how real estate taxes are allocated or levied upon tenants. In many cases, properties may need to be reassessed and — where there are agreements in place with fixed percentages or allocated contributions — the allocation of property taxes needs to be reviewed to ensure unit owners pay their fair shares.



Equally important, tenants need to ensure that they understand the impact that the sale of a property can have on its assessment and resulting real estate taxes. Many leases have provisions that cap real estate tax increases related to a sale transaction. Even so, it is important to undertake a periodic review of changes to property assessments as well as understand local assessing policies.



Most retailers have increased their lease auditing capabilities in this changing landscape and continue to be diligent in their pursuit of identifying overcharges. Both landlords and tenants should be willing to discuss fixed charges and base years for retail tenants, as both parties are looking for some certainty in budgeting and store costs and are trying to reduce the expense and time involved with tenant audits. These types of negotiations will hopefully bring greater stability to each party.






Jeffrey Strauss is a managing director in the Real Estate & Infrastructure industry group at FTI Consulting, Inc. He may be reached at [email protected].


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