From Confusion to Confidence...The Reconciliation Process Explained

If you’re a small shop owner accustomed to seeing reconciliations, the end product you’re sent is probably an invoice with a few calculations and a bottom line number due to or due from the landlord.  If you’ve ever questioned aspects of the reconciliation it can be hard for the landlord’s representative to explain, and therefore even more difficult for the tenant to understand. This is especially true if there is a significant amount of money at stake or if things start to get emotional.  My goal is to expand on the first entry of my blog (Tis the Season: CAM Reconciliations), which I recommend you take a few minutes to read over if you haven’t already. 

The better you understand the mechanics of reconciliations the better you will be at productively discussing these issues with the Landlord.  Nobody wants to find out they owe their landlord more money than they expected to, but at least that frustration won’t be compounded by a lack of understanding. 

At the end of the calendar year (or sometimes the landlord’s fiscal year) the landlord looks back at their operating statements to see the exact amount of expenses in each category on their ledger.  Some common examples are line items such as:

  • landscaping
  • parking lot repairs
  • pylon sign repairs
  • administrative expenses
  • management fees
  • utilities, etc. 

 They will also include real estate taxes and insurance in most cases.  These should be actual expenses paid by the landlord during the time frame included in the reconciliation, and the landlord should have copies of invoices or backup that coincides with these expenses. How much they’re willing to share of that backup, if any, will depend on your lease and landlord.  For use in this example we are going to assume the total of the landlord’s annual CAM expenses is $50,000.

In a standard NNN lease tenants pay their “pro rata share” of expenses.  Usually this is calculated by dividing your space’s square footage by the gross leasable area (GLA) of the shopping center, but there are many variations of pro rata shares so read carefully when reviewing this lease section.  

Also, a tenant’s pro rata share can vary between the NNN categories, so just because your share of CAM is one percentage doesn’t automatically mean your share of taxes are the same. For example, if the tenant rents 1,000 square feet and the sum of all rentable space in the shopping center is 30,000 square feet, then their pro rata share is 1,000/30,000= 3.33% of the expenses. 

Now that we know the total amount the Landlord spent on CAM for the shopping center, and the tenant’s pro rata share, we have two of the three necessary variables for the reconciliation.  The final piece is finding the total annual amount that the tenant paid in CAM and calculating the difference between what was paid and what is owed. 

 Let’s say a tenant paid all 12 months of CAM and it was $100 each month, so the total paid in was $1,200.  Going back to our prior number the total annual CAM expenses for the landlord were $50,000. The tenant’s pro rata share of that would be $50,000 x 3.33%= $1,665, but they already paid $1,200 during the year, so the tenant owes the landlord $1,665 – $1,200= $465 for CAM.

It’s important to understand that in a perfect reconciliation with no unexpected expenses, the result should be zero.  However, in practice, that will almost never be the case. Many services such as landscaping are contract services with a negotiated rate for the year, but items like snow removal, utilities or other variable expenses cannot be perfectly predicted.  

Another factor to consider is that some leases base their estimated NNN reimbursements based on budgeted numbers, and some use the prior year’s actual numbers. There are positives and negatives to both ways of calculating the reconciliation, but you should know what your lease stipulates to understand your landlord’s calculations.

Once you receive your reconciliation invoice there are a few steps you should take to insure the accuracy of the billing and potentially save yourself money.  If the management company is a large operation with many properties, your invoice could easily be one of thousands they send out, and they are subject to error.  

First, verify that the amount the landlord is showing they received matches the amount of reimbursements you paid in for the year. If you’ve incurred late fees and had other billing issues this may be easier said than done, but it is so important.  

Second, make sure that the pro rata shares they are showing match your pro rata shares as dictated by your lease. 

Third, make sure that the arithmetic is correct in the equation of your pro rata share minus what you paid in.  

Lastly, you need to verify the total expense amounts.  Add up every number you are provided and make sure they tie in properly to each expense. Go online to your city or county tax site and make sure that the tax amount you were billed is correct for the current year. I’ve seen these steps result in hundreds or thousands of dollars of mistakes, make sure you are not one of them, because if you don’t then nobody else is going to.

By: Chris Burnett

Farm Fresh Closings and Bi-Lo Bankruptcy: What it Means for Nearby Shop Owners

Thousands of small business owners across the country have woken up sometime recently to a headline that the major store in their shopping center just went out of business.  Most recently, it was Toys R Us on a national scale. 

Locally and regionally it’s the recently announced sale/closure of Farm Fresh, a regional grocer that has been in the Coastal Virginia area for many years.  Another is the bankruptcy filing by Southeastern Grocers whose brands include grocers Bi-Lo, Winn Dixie and a few others. 

Each of these impacts multiple locations within secondary and tertiary markets, such as Virginia Beach and Chesapeake.  If you are a small business owner in a shopping center where the main attraction is suddenly out of business, what can you do?*

Protecting yourself in a lease is similar to insurance — you want to make sure you’re covered before the occurrence of a bad event. 

I’m not going to sugarcoat it, there’s probably nothing you can do if this has already transpired, except learn a hard lesson for the future…unless you negotiated a co-tenancy clause into your lease, in which case that may be your only direct recourse (i.e.: your insurance policy).

What exactly is a co-tenancy clause and how can it protect you? 

Like I said, it’s an insurance policy…a co-tenancy clause provides some form of recourse for tenant in the event an anchor tenant “goes dark”.  

The idea here is that you, small business tenant, picked the location in part because of its proximity to the big business tenant who is attracting a lot of people, who will in turn see and (hopefully) patronize your store because of its convenient location.  

If aforementioned big business (ie: Farm Fresh) closes and all their former patrons are now going to the other shopping center with the competing grocery, then your small business is likely to suffer.  Hence, the need for an “insurance policy”(aka: co-tenancy clause) in your lease that requires the landlord to provide some relief if the big business shutters.

Okay, but what exactly is an anchor?  

Well, that’s debatable — and therefore negotiable in every lease.  Typically, an anchor is one of the largest tenants in a center, occupying a significant square footage or percentage of the overall property.  

It is usually going to be a household name people are familiar with in your market, and one that drives a lot of traffic (i.e. grocery stores, sporting goods, household goods, hardware, etc.).  The definition will be specifically articulated in your lease by either naming the tenant explicitly or listing the square footage requirement or some other criteria that won’t be left open ended.

And, what happens if the anchor tenant goes dark?  

The level of protection and severity of consequences is also negotiable and may range from discounting your rent to changing your rent to a percentage of your gross sales in lieu of fixed amount, or the tenant may even have a right to terminate the lease entirely.  There will typically be a caveat that the Landlord will have a specific time frame to re-lease the space to another anchor tenant, but if that doesn’t happen within said timeframe the tenant likely would have the right to invoke the co-tenancy clause. 

I encourage everyone to go through your lease and look for a section related to Co-Tenancy, so you can be prepared if you find yourself in this unfortunate position.  If you don’t see that heading you may want to check the default section or any termination clauses to see if there is relevant language buried in there. Next time you’re up for renewal or opening a new location, maybe this is something you should consider asking for…like an insurance policy, you hope you never need it, but it’s nice to know you have it just in case. 

I think most landlords would rather concede some form of co-tenancy clause rather than risk losing your tenancy.  On the flipside, if the Landlord isn’t willing to concede this, maybe there’s reason to be concerned with the health of the anchor tenant?

*Editor's note: The author is not an attorney, and this is article is not intended as legal advice.  As a real brokerage estate firm, we recommend our clients engage legal counsel for preparation of lease agreements, purchase and sale agreements, and to advise on property rights and landlord/tenant matters.

Originally published on Alignable.com on April 17, 2018

By: Chris Burnett, Commercial Sales & Leasing, Denton Realty Company