Shopping Centers Are Like Health Care

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There may be a connection between our national health care (insurance) policy and our industries’ approach to back-charging for common area expenses (operating costs) and real estate taxes. Oh, come on – isn’t this a craven attempt on the part of Ruminations for topical relevance? Read on and judge for yourself.

Wikipedia provides as good an explanation of “community rating” as one will find anywhere. For its relatively short entry on the subject, click: HERE. For those who don’t want to leave the page, take a look at this:

Community rating is a concept usually associated with health insurance, which requires health insurance providers to offer health insurance policies within a given territory at the same price to all persons without medical underwriting, regardless of their health status.

Pure community rating prohibits insurance rate variations based on demographic characteristics such as age or gender, whereas adjusted or modified community rating allows insurance rate variations based on demographic characteristics such as age or gender.

Let’s think about shopping centers or mixed-use projects. Each contain a variety (or “mix”) of tenants, almost always reliant on community services (parking, utilities, maintenance), but very often at different service levels. Just as a community of individuals includes high-intensity health care users and those who haven’t seen a physician since graduating from pediatric care, a shopping center is populated by low-traffic, high-dollar jewelers as well as by high-traffic, water guzzling, gas gulping, wet waste producing restaurants.

Many, many shopping centers, especially smaller ones, use community rating to recover operating costs, insurance costs, and real estate taxes from their tenants. Every tenant pays the same amount per square foot of space. At that lunch among friends, it’s easy to hack-up the “check” by taking its total and dividing by how many sat at the table. Everybody pays an equal share, even the one who didn’t drink any wine. Sometimes you pay more than what a “separate” check would have read; sometimes, less. So, why “split” the check when separate checks would avoid anyone feeling cheated or feeling guilty? Simply speaking, it’s easy. It’s easy for the dining party to avoid a confrontation with the restaurant staff – “We’d like 11 separate checks.”

The same holds true for landlords – it’s easy. (In this case, the landlord is the restaurant.) What’s more, unless there is vacant space, the landlord doesn’t care. Unlike the person collecting everyone’s share of the restaurant check, the landlord wouldn’t be paying a share of the bill.

Some operating costs are “fixed,” i.e., aren’t affected very much by occupancy rates. Others are “variable.” Those that are “variable” are affected by tenants’ use. The more tenants, the more water and energy used. More customer traffic – more wear and tear on the parking lot. Longer holiday hours means more nighttime lighting costs. You get the idea.

Utility (including water) use is the biggest variable, not only in the aggregate, but especially on a tenant vs. tenant basis. Dry goods stores, toy stores, jewelers, and users of that type use as little water as any tenant would use. Restaurants, however, live on water. In fact, they resell water. Is there any justification for charging all tenants for “water” (or electricity, gas, HVAC, etc.) at the same per square foot rate? That is, is there any justification from a tenant’s point of view? We think there is. It may not be a winning view, it may not be the best view, but it shouldn’t be ignored.

The balancing factor is “vacancy.” Vacant spaces don’t consume more than minimal utility services. If a property has an average vacancy rate of 10%, tenant’s get a 10% “discount” on utility pass-throughs because someone (i.e., the landlord) not using utility services is paying 10% of the bill. That’s the friend who had “toast and tea” at lunch. [Say “thank you” for buying me (most of my) lunch.] In fact, there is a 10% discount across the board with our toast and tea consuming landlord picking up a disproportionate piece of the operating cost “check.”

We don’t deny that some tenants, the high consuming ones, get a better break than others, but if you are paying a “fair” amount, why gripe if others are getting a better deal? [OK, that’s human nature.]

Administrative convenience is one reason for using pure community rating at a shopping center. Simplicity is another. But, let’s not forget about “cost.” By this time, many readers are hoarse from screaming: “meters, submeters, meters, submeters.” Direct utility metering makes very good sense when available. Direct utility metering cuts out the middle-man. Landlords aren’t reselling utilities. But, it isn’t always possible to get direct metering, especially in older projects. Even where the “law” or “engineering safety” would allow separate circuits, it can be expensive to refit electric circuits, and sometimes even prohibitively expensive. Even brand new projects, especially mammoth ones, just don’t offer a practical way to provide separate services connections to the providing utilities. Drilling down to the basics – it isn’t always cost effective to install separate metering.

So, what about submetering? We’ve written about one aspect of submetering before and commend reader to click: HERE [and to read about electricity charges, try clicking: HERE] to visit that blog posting. Here’s a short summary in the context of today’s posting. Depending on whether a particular utility provider has a rate table that increases with greater consumption or decreases with greater consumption, there are always winners and losers. Further, submeters are often read by a billing company and those companies add their own charge to the “bill.”

Certainly, using utility costs is an easy way to describe the difficulty of achieving billing “fairness,” but let’s not ignore some often-ignored other recovered costs. Early-on, we used a jewelry store as an example. Jewelry stores are characterized by few customers spending a lot of money per purchase. [A particular computer store seems to draw a lot of traffic with many browsers, some customers spending modestly, and a few spending big bucks. 2014 dollar per square foot figures: Apple – $4,798; Tiffany & Co. – $3,132; Michael Kors – $1,896; Lululemon America – $1,558. A typical department store: $160 – $200.]

So, a high-end jeweler doesn’t wear-out the parking lot and doesn’t “dirty” the corridors nearly as much as does a high-end computer seller. So, why should it pay the same “rate” for parking lot maintenance or corridor cleaning as should high-traffic users?

Well, that’s the set-up. There’s a lot to be said about this topic. Too much, in fact, for a single blog posting. So here’s what we had in mind for today – employ the “cliff-hanger” – make readers wait until next week to learn what else we have to write about this topic. That doesn’t mean that readers shouldn’t share their thoughts at this point. Ruminations isn’t beneath stealing good thoughts and using them to revise next week’s posting (often, in the best Milton Berle tradition, without giving appropriate credit). So, if you’d like to contribute your thoughts, please post a comment below.

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