Get Key Documents, Info to Avoid Future Rent Surprises
Making a profit from running your business at a mall or shopping center is the ultimate goal, and to further that, you might be lured by reasonable, or even low, base rent. But an affordable base rent figure is only as good as the total when you add incidental costs—which can be so high that they’re a deal breaker.
Potentially, the biggest costs that can kill a deal are common area maintenance (CAM) costs and operating expenses. So nailing these down during lease negotiations is of the utmost importance.
One way you can avoid getting an unpleasant surprise when you get your additional rent bill is to ask for a disclosure of CAM costs and operating expenses.
One of the documents relating to office building and shopping center CAM costs you should demand prior to negotiations is the expense schedule. Expense schedules typically break down the expenses by category—such as cleaning costs, energy, and insurance. An owner generally prepares an expense schedule annually and then sends it to tenants after the end of each fiscal year. You should request expense schedules covering the past several years. They will help you determine what—and how much—was charged.
So how will this help? Because there are well-established norms for each category of expenses, an expense schedule is a good indicator of whether the building or center is being managed properly. (High expenses can be a sign of mismanagement, but bear in mind that energy and insurance costs have risen dramatically over the past few years.) If you’re dealing with a new building or center, review a budget of its projected CAM costs and operating expenses, including real estate taxes.
Other valuable information is the historical operating expense/CAM cost data. Try to review all underlying financial information (including sample escalation statements) to determine the historical amounts for CAM costs and operating expenses, including real estate taxes.
This will help because it will give you an idea of how much those costs have risen at the building or center. Look at historical data for the past three to five years to estimate what your annual increases might be. Be aware that many owners will resist giving you their historical data unless you have lots of negotiating power.
For three more types of key documents to demand and key questions to ask the owner before you proceed with lease negotiations, see “Perform Due Diligence to Avoid Additional Rent Surprise,” available to subscribers here.