How retailers can recoup funds with CAM Audits
The continued popularity and development of town centers and lifestyle centers have made it clear that retailers can no longer go it alone. They must co-exist in a symbiotic live-work-play environment, and that means they must also co-exist with the different demands and cost structures of residential and office spaces.
It is more important than ever, therefore, for retailers to evaluate their leases in an effort to plan and implement strategies that will make the most economic sense for their individual store locations. In the past, many of the larger retailers have relied on standard templates for CAM language. They deployed them automatically across their portfolios with minor variations for specific shopping centers. But today, the cookie cutter approach is out and retail leases are being negotiated with more lease caps, fixed-fee language, and base years — strategies that have typically been the sole province of office leasing.
As more centers are repositioned and leased to unconventional tenants that function outside the retail arena, it is critical that retail tenants aggressively review their CAM expense charges to identify potential instances of overbilling. Below are two particular areas of concern in performing common area maintenance audits for mixed-use properties:
Allocation of Expenses
The allocation of costs among the various tenants and cost pools are both significant concerns for tenants at mixed-use properties. As such, it is critical that tenants have an understanding of and insight into the methodology used and the manner in which costs are allocated between the different cost pools of the property. If the property has changed its tenant mix from retail to a combination of retail and office tenants, there may be varied reimbursement agreements, such as office tenants that only pay increases over base year expenses and retailers that pay a net share of expenses.
Landlords may be incentivized to allocate different percentages to different cost centers based on the individual reimbursement methodologies in the respective leases. These types of overcharges can be difficult to discover without the benefit of a rigorous review of the invoices and contracts. It is usually a red flag when the tenant only sees an invoice for an allocated amount and is not provided the details of the methodology supporting the allocation.
Once there is a base-line understanding, the allocations should remain relatively constant, absent significant changes at the center regarding operating costs and required maintenance. To address this potential area of concern, some landlords are now writing leases and amendments that convert their retail tenants to base year leases, or, in many cases, to fixed reimbursements.
Real Estate Taxes
Many retailers use a segmented process to review real estate taxes and CAM billings, but today a more critical review is warranted. Big changes in tenant mixes mean bigger potential for errors in the calculation and allocation of real estate taxes that are billed to office, retail, and residential unit owners.
Increasingly, landlords have converted portions of retail centers to alternative uses that may further affect how real estate taxes are allocated or levied upon tenants. In many cases, properties may need to be reassessed and — where there are agreements in place with fixed percentages or allocated contributions — the allocation of property taxes needs to be reviewed to ensure unit owners pay their fair shares.
Equally important, tenants need to ensure that they understand the impact that the sale of a property can have on its assessment and resulting real estate taxes. Many leases have provisions that cap real estate tax increases related to a sale transaction. Even so, it is important to undertake a periodic review of changes to property assessments as well as understand local assessing policies.
Most retailers have increased their lease auditing capabilities in this changing landscape and continue to be diligent in their pursuit of identifying overcharges. Both landlords and tenants should be willing to discuss fixed charges and base years for retail tenants, as both parties are looking for some certainty in budgeting and store costs and are trying to reduce the expense and time involved with tenant audits. These types of negotiations will hopefully bring greater stability to each party.
Jeffrey Strauss is a managing director in the Real Estate & Infrastructure industry group at FTI Consulting, Inc. He may be reached at [email protected].
ICSC: Omnichannel shoppers to rule this holiday
Nearly all shoppers will be shopping a variety of channels this holiday season.
Ninety-six percent of shoppers plan to make a purchase from a retailer who has both a physical and an online presence, with 40% of them buying online and picking up in-store, according to a report by the International Council of Shopping Centers. And 81% of those shoppers plan to make additional purchases when collecting their item(s).
Consumers expect to spend on average $728.40 on gifts and other holiday related items this season, revealed ICSC's Holiday Shopping Intentions Survey. The group forecasts 3.8% year-over-year growth in retail sales for this holiday season.
"Our annual Holiday Shopping Intentions findings demonstrate that consumers are very optimistic this holiday season and that physical retail remains a cornerstone of the holiday season,” said Tom McGee, president and CEO, ICSC. “The more agile retailers are in meeting consumers’ demands for the seamless convergence of physical and digital shopping, the more success they will see.”
The ICSC report found an uptick in the number of people planning to shop before Thanksgiving at 66% — with 27% starting as early as August. The expected extension of the shopping season means the potential of more sales for retailers, as 46% of shoppers say they plan to spend more this holiday season.
In other key findings from the report:
• The top four categories for purchases this year are: Gift cards (66%), apparel/footwear (54%); toys and games (46%) and electronics/devices (34%).
• Eight-five percent of shoppers plan to research online prior to making purchases in-store. Three-quarters of holiday shoppers who have a mobile device will use it for shopping in a store to compare prices, get discounts and check availability. Nine out of 10 holiday shoppers expect to visit a retailer’s website or app to browse product information.
• Eighty-one percent of shoppers will visit a mall/shopping center to eat out (53%), catch a movie (32%) and/or participate in a philanthropic event or plan to attend a Christmas tree lighting/Menorah lighting/holiday parade (combined activities at 17%).
• Millennials will play an integral part in this holiday season with 92% planning to spend money in a physical store. On average, this demographic plans to spend $554.40 on holiday gifts and related items.
• More than any other age group, Millennials plan to take advantage of discounts on Black Friday (57%). Three-fourths of Millennials shoppers plan to spend online at retailers whose stores they also visited and 50% of them will buy online and pick up in-store.
“They [Millennials] not only want experience but they want convenience as well, which we see in their intent to utilize both online and physical,” stated McGee. “The theory that they are a digital-only generation is simply not true; they want digital to be a part of their transaction rather than the entire transaction.”
The two companies with the highest online grocery satisfaction are…
If traditional supermarket retailers want to become online destinations for grocery, they need to step up their digital shopping experiences.
In fact, shoppers rated their overall satisfaction ordering food and grocery items online highest with Amazon (4.63 on a five-point scale where five is highest), followed by Walmart (4.41). Supermarkets/food stores trailed behind with a rating of 4.32.
This was according to the “2017 U.S. Online Grocery Shopper Study,” from The Retail Feedback Group (RFG).
About half of online shoppers plan to purchase grocery items more often in the coming year. Where they choose to shop is influenced by brands that provide a variety of ordering, fulfillment and people factors.
For example, Amazon shoppers rated nearly all categories of the online shopping experience significantly higher than supermarket/food Store shoppers.
Amazon shoppers also rated six elements significantly higher than Walmart shoppers:
• The online checkout process worked well and without problems
• The website/app worked smoothly during the whole order process;
• The items I wanted to buy were available on the shopping website;
• It was easy to navigate through the site/app to locate the items I wanted;
• The order pickup and delivery process was prompt and efficient, and
• The checkout staﬀ or delivery driver was friendly.
Walmart shoppers rated four elements significantly higher than supermarket/food store shoppers:
• The online checkout process worked well and without problems;
• It was easy to identify sale or specials prices and have those discounts applied during checkout;
• Overall, I received good value for the money I paid for this order; and
• There was an available pickup time or delivery time that was convenient for me.
Supermarket/food store shoppers registered lower "highly satisfied" scores on nearly all elements measured versus Amazon and Walmart online grocery shoppers. The only element that was comparable for grocers: the checkout staff or delivery driver was knowledgeable and professional.
"Clearly Amazon has effectively leveraged its deep roots in online retailing to inform their efforts in online grocery, leading to the strongest ‘highly satisfied’ marks found in our research,” said Brian Numainville, RFG principal.
“Walmart, although registering lower than Amazon on overall satisfaction and several measured elements, also scored meaningfully higher than supermarkets/food stores in several areas core to their brand, including value, as well as identifying and receiving discounts,” he added. “It appears supermarkets and food stores have work to do to improve their scores in online grocery shopping relative to these retailers.”
Consumers indicated that online grocery shopping strengths include making the most efficient use of their time and being more convenient. Conversely, in-store shopping strengths were providing products best meeting standards for quality and freshness, offering a better selection of products for shopper needs, making shoppers feel more valued as a customer, providing better customer service, showing the company knows and cares about food, and providing more value for the money spent. A few areas, including pleasantly surprising, enjoyable, and taking better care of securing payment and personal information, received more of a balanced assessment across both types of shopping.
The one area that fell short across the board however, was produce (39%). About eight out of 10 online shoppers indicated that freshness and quality were the top factors they consider when purchasing produce online. Among those who do not purchase produce online, the top reasons were wanting to choose produce items themselves (66%) or that produce might not be fresh enough (55%). The lowest reasons were limited variety available (16%) or that prices might be higher than in the store (14%).