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. [Read more…]

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What Does Difluoromonochloromethane Mean To Landlords And Tenants?

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Today, Ruminations will seem to be discussing difluoromonochloromethane. Though it might seem that way, we’re actually using it as a proxy for a more general “suggestion.” But, that will need to wait.

Difluoromonochloromethane has been a remarkably useful chemical compound. If you know about it at all, you probably know it as “R-22.” If you do, then you can skip right over the next sentence. R-22 is a hydrochlorofluorocarbon-based refrigerant used in about half of this country’s commercial air conditioning systems. If has some other, less common, uses but when it comes to HVAC, it is “king.” Down the road, however, it will be abdicating its office. The process began a number of years ago, but the closer we get to 2020, the clearer this will be.

This refrigerant is an ozone-depleting substance. Regardless of any reader’s position about climate change or global warming, no one thinks that destroying atmospheric ozone is a good thing. So, 30 years ago, following a series of meetings in Montreal, lots of countries, the United States included, signed an international treaty. To implement that treaty, those countries, including the United States, embarked on separate programs to end the use of ozone-depleting substances.

Here’s a short translation of what the United States did with respect to R-22 starting in 1993. Manufacture or import of equipment using R-22 refrigerant after 2009 was banned. Production or import of R-22 is banned after 2019. [By the way, by 2030, the entire class of chemical compounds known as hydrochlorofluorocarbons will no longer be manufactured in, or imported to, the United States. [Read more…]

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You Snooze; You Lose; Maybe; Probably

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What is in the water that many, too many, landlords drink? What can they be thinking? The same can be said (though not as often) about tenants, and we will do so. What is in the water that many, too many, tenants drink? What can they be thinking?

The subject is asking for money rightfully owed to those drinkers. It might be for taxes or it might be for operating expenses, percentage rent, insurance premiums, reimbursable expenses or refunds for the payment of any one or more of those. It might even be for other things such as overdue rent. Yes, why do rightfully billable charges or rightful claims go unbilled or unclaimed until years later when someone wakes up, often, but not always, a successor landlord or tenant?.

[If you] SNOOZE, you [can] LOSE. “Do not spend your days gathering flowers by the wayside, lest night come upon you before you arrive at your journeys end, and then you will not reach it. [Isaac Watts].

If you haven’t experienced the situation or been asked about the following situation yet, it is just that you haven’t been at this real property leasing thing long enough: After “X” years (“X” often being 5 or more) of failing to bill a tenant for taxes or other monies genuinely owed, a landlord sends out a (BIG) bill. Both the tenant and its landlord turn to trusted advisors and ask: “How far back can the landlord go and still have the right to collect what is owed?” [Read more…]

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Who Should Pay To Replace the HVAC, Landlord Or Tenant?

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Should a tenant be required to pay for the replacement of pieces of the real property within or serving its leased premises? We don’t know. That’s because it isn’t a legal matter. It isn’t a moral matter. It isn’t a matter of logic. It isn’t a matter of fairness. It is part of the economics of the deal, one whose answer will be determined by the negotiating process.

At the end of the day, the issue isn’t about the “money,” it is about the risk – the uncertainty. Why does Ruminations dare to say it isn’t about the money when virtually every reader has already thought: “Are you out of your mind”? That’s because the “market” needs to make a profit one way or another. To assure there is a real estate market, the aggregate tenant rent at a property needs to be sufficient to generate that profit. In the aggregate, the industry will either generate acceptable investment returns or property values will drop to a point where an investment in property will “again” generate an appropriate return. [Read more…]

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Tenants Don’t Need To Carry Insurance (Maybe)

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We’ve shared many of these insurance thoughts before, but not all in the same place. Today, we’ll be staying out of the “weeds,” not because “there be snakes,” but we don’t want “detail” to drown out some basic messages.

Insurance is a credit enhancement. If you have a lot of money (think Exxon, Bill Gates, etc.), you can cover your own obligations, pay your own liabilities. You don’t need a sugar daddy back-up. And no one should require you to have one. A landlord who does an absolute-net lease of an entire $100 million building to Exxon, doesn’t need Exxon to buy property insurance from insurance companies. Exxon can buy the insurance companies. It can handle the loss. Its net worth is about $500 Billion. It has more than $50 billion of cash on hand. Chubb Insurance has equity of about $16 Billion. We would have said “only,” but that’s “only” when compared to Exxon. [Read more…]

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A Management Fee Puzzle For Tenants

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It appears to be generally accepted, though we don’t know why, that management fees are validly included within common area costs (a.k.a. “operating expenses”). We take comfort in something that John Stuart Mill wrote in On Liberty: “It is as certain that many opinions, now general, will be rejected by future ages, as it is that many, once general, are rejected by the present.”

To Ruminations, management fees should be treated as a cost of ownership, not an expense for items that benefit a tenant. The property owner can choose to self-manage what it owns or, in the alternative, it can do little or no work and treat its shopping center or other property as if it was a share of stock in General Motors. It is one thing to seek recovery for the administrative overhead cost of managing the common areas, but quite something else to seek recovery for the cost of managing tenants, working on leasing of the property, dealing with financing issues, bookkeeping, preparing tax returns, and for the performance of similar tasks. [Read more…]

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How Much Profit Should A Landlord Make From Pass-Through Items?

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Over the last couple of months, we’ve seen bits and pieces of a discussion (or discussions) as to whether a landlord should make a profit on operating expenses or other pass-through charges. Much of what we’ve seen didn’t appear to be very responsive to that question. It was about protecting one party or the other. That gives Ruminations an opportunity to weigh in on the operative verb: “should.”

You don’t have to get to the bottom of today’s posting to get our view. Simply speaking, it is: “Why not?” [Read more…]

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Getting On The Same Page When It Comes To Operating Expense (CAM Costs) Reporting

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A lot of trees have been cut down for the paper used to write about operating expenses or common area costs. That’s because when you talk about passing along operating costs, you are talking real money. Yet, aside from deals where the operating expense charge is a fixed (and usually escalating) amount, far less negotiation is had for a nickel or a dime per square foot of operating expenses than is the case with the same nickel or dime of basic rent. Yet, a nickel is a nickel and a dime is a dime [See: John Lee Hooker, Bottle Up & Go], whether called base rent or operating expenses. In sum, like weather, everybody talks about it, but nobody can do anything about it. But, is that really true? In part, “Yes”; in part, “No.” Here’s our attempt to start a discussion – kill more trees. [Read more…]

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