Lease negotiations after LOI. CAM cap agreed on, but not comfortable about it...
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[{"id": "fytnx13", "text": "Is this specifying no more than 5% increases to pass through charges or no more than 5% of rent as pass through reimbursements? How long have you owned the property?  Look back and see if this would have come into play.", "replies": [{"id": "fytqsmp", "text": "No more than 5% increases in CAM charges.\n\nProperty is less than a year old. 2 current QSR tenants started their leases late 2019.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fyttu46", "text": "It\u2019s hard to say without seeing the LOI or knowing location, but I have seen it both ways.  I usually push for the cap on controllable expenses only.  Putting a cap on taxes can cause trouble down the road especially as you go to sell it will typically get flagged by prospective buyers.", "replies": [{"id": "fz5d51l", "text": "Controllables only for a CAM cap \ud83d\udcaf", "replies": [], "depth": 2}], "depth": 1}, {"id": "fytuako", "text": "A 5% variation in CAM is pretty low.  One big snow storm or a parking lot resurfacing could put you on the other side of that figure. They probably are talking about all pass throughs (taxes, insurance, maintenance) and looking to limit creeping rent increases.", "replies": [], "depth": 1}, {"id": "fyvwy6b", "text": "There\u2019s no \u201cright\u201d answer here, unfortunately. The LOI is too vague and now you\u2019re negotiating. How many other big items are you still arm wrestling over? Maybe you can horse trade?\n\n5% non cumulative cap on all expenses is still a decent buffer. At least you got \u201cnon cumulative\u201d which is better for you. As others have posted, I typically see a carveout for controllable vs non controllable expenses being capped. How bad do you want/need this tenant?", "replies": [{"id": "fywhdox", "text": "Thanks for the reply. This tenant seems like they\u2019d be an excellent fit for the property, so we very much want to see them in the space especially considering the times.\n\nHow is non cumulative better for us?", "replies": [{"id": "fywkfwq", "text": "Sorry brain fart... non cumulative is better for the tenant. Cumulative would allow for a \"catch up\" in future years. So, let's say expenses only grow by 4% in year 2, but then 6% in year 3. Landlord gets the 1% catch up from year 2 and adds to the 5% in year 3 for a total of 6% = no leakage. Non cumulative ignores prior years, so in year 3, although expenses grew by 6%, you could only recapture the 5% increase = 1% leakage.\n\nDoes your market experience higher inflation relative to the US economy? If not, then 5% should be plenty of room, depending on how long the lease term is (longer = more risk of leakage as the compounding effects of the cap are felt). If you like the tenant, then it may not be a material impact to the economics, especially if you have some control over expenses (shop the insurance renewals, management fees, etc).\n\nIf there is a lease renewal option built into the deal, I would at least negotiate for a reset in the CAM reimbursement upon renewal... might be a trade you can get.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]