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LANDLORDS, TENANTS SAY RELATIONS GETTING WORSE

BY NANCY COHEN

Ever since the Garden of Eden’s landlord evicted a couple for failure to adhere to his terms, landlord-tenant relations have been less than idyllic.

“The nature of the relationship is a hostile one, and it has been since there were tenants on the land,” observed Chris Fox, president of Silver Fox & Co., Minneapolis, a retail consulting firm that he formed after retiring last year as executive vice president of hair salon operator Regis Corp.

Even so, Fox and others say, the relationship has deteriorated over the past 10 or 15 years, with one retailer going so far as to liken the current state of landlord-tenant relations to the rapport U.S. President George W. Bush enjoys with Iraqi President Saddam Hussein.

“The big problem is that there is no concept of partnership — it’s a one-way street with developers,” complained that retailer, Jeremy Reitman, president of Montréal-based Reitman’s Ltd., which operates seven apparel chains across Canada.

Not surprisingly, that is not the way that developers see things. Slowing retail expansion and consolidation in each retail category have given greater leverage to the remaining players, opined Donald G. Provost, a principal at Alberta Development Partners, Englewood, Colo.

“Now they will take not only the best location, but the very best terms they can cut,” Provost asserted. “That makes negotiations considerably more difficult.”

Though the two sides have historically been in opposition, they do at least seem to agree on the sources of more recent friction: the rise of public companies, the shift in focus from new development to asset management and escalating costs. All these factors have resulted in a stronger-than-ever emphasis on dollars. Meanwhile, the swing toward institutional ownership and large, consolidated companies has slackened the personal ties that once bound the industry’s deal makers.

“Decisions are all based on numbers, and there’s generally less camaraderie than there used to be,” said Andrew Shedlin, CLS, SCSM, a lawyer and the president of Highland Park, Ill.-based Andrew Shedlin Cos., a retail and development consulting firm.

With little new development and great attention to Wall Street, landlords need to “squeeze every possible dollar out” of existing properties, Fox said. “It all comes down to money — landlords want as much as they can get, and tenants want to pay the least.”

That may always have been the case. But the way payments are calculated today has changed, suggesting a new landlord-tenant dynamic. Percentage rent, once a significant component of total rent, has all but gone the way of 100 percent financing, noted David Zoba, executive vice president and general counsel of Galyan’s Trading Company, the Indianapolis-based sporting goods chain. Because lenders consider only fixed rents in valuing a property, landlords have raised minimum rents so high that few tenants ever reach the breakpoint and pay percentage rent.

“With percentage rent, the lease used to reflect a real partnership in business,” Zoba said. “The landlord was saying, ‘If you do well, so will I.’ Now it’s more adversarial.”

The two parties may not be only adversaries; the acquisition and breakup of portfolios means that they may also be strangers.

“Tenants complain, ‘We don’t know who is going to own the center,’ ” said Rene F. Daniel, CLS, president of the Baltimore-based Daniel Group, consultants and leasing representatives to landlords. “They say, ‘We made a deal with Charlie today, but the guy down the road owns it tomorrow.’ All this trading back and forth of properties is disconcerting.”

Another impediment to closer relations is the sheer size of developers and retailers alike.

“The bigger you get, the harder it is to give individualized attention to any one property,” Shedlin said. And where a handshake once sealed a deal, it now only begins a process that draws in other departments, each with its own opinions and requirements. Further, Shedlin notes, disputes can easily arise when a deal is administered by someone unfamiliar with all the details discussed by the original deal makers.

The impersonal number-crunching and the hard-to-penetrate hierarchies that often come with expanded corporate size have frustrated both sides, experts say.

“Tenants are having difficulty getting decisions” because landlords manage such large portfolios and may be stretched thin, Daniel said. By the same token, he says, he has found it much more difficult to wring decisions from prospective tenants over the past 10 to 15 years.

“Deals take so much longer now,” he said. “Tenants’ real estate people aren’t making the decisions anymore, the operations people are, and operations people don’t understand real estate. They have unrealistic, self-defeating rules about what they’re willing to go into — 200,000 in the trading area, three anchors, 750,000 square feet. What they should be looking for is the most productive center, the best in town — not dismissing a property because it doesn’t fit their rigid parameters.”

Tenants have their own complaints about adherence to what seem to be arbitrary numbers.

“You’ve been a material contributor to the success of a shopping center for 15 years, bringing in traffic, but when the time comes to renew, the lease goes up 50 percent,” said Fox. “You’re squeezed right out. ‘Maximizing cash flow’ doesn’t reflect any loyalty, and tenants feel exploited and disappointed.”

CAM or scam?
Money matters have never endeared landlords to their tenants. But skyrocketing expenses are chafing already thin-skinned relations. As landlords pass along ever-higher charges, tenants protest their inability to control or predict occupancy costs and increasingly question the accuracy of the billing.

“Costs have escalated so dramatically, so much faster than inflation, that tenants start to wonder, ‘Are shopping centers being managed correctly? Is the accounting fair?’” said Fox.

“It’s unfortunate for landlord-tenant relations,” said Zoba, “because landlords usually aren’t making money on things like taxes that go up and have to be passed through, though tenants think they’re milking it.” All the same, he said, the concerted effort to recover costs “has resulted in an explosion of landlord charges, which can now be 50 percent of the total occupancy cost.”

For their part, landlords complain that few tenants grasp a landlord’s financial predicament: As costs spiral upward, an ever-larger portion of the amount tenants pay consists of pass-through expenses that provide no profits. And such recent high-profile retail bankruptcies as Kmart’s only underscore the landlord’s exposure, said Provost.

The chance that a retailer may be here today but gone tomorrow explains his stance on monthly billing for property taxes, for example. “Many retailers want to be billed annually, when you receive the tax bill, but as a landlord you want a monthly payment based on historical bills,” he said. “Retail businesses come and go, but you’ve still got the tax liability and can’t just hope they’ll be able to pay when the time comes.”

Most retailers would concede that landlords are entitled to make a profit, just as they are. Galyan’s Zoba notes, however, that costs have soared even as corporate expansion has ostensibly created economies of scale. What’s more, he said, “some landlords have gotten pretty clever about alternative revenue sources and passing through costs.” He cited one firm that charged for outsourcing trash collection to a company that it partly owns.

Such abuses have fed suspicion, resulting in requests for audits, a kind of second-guessing that landlords consider an expensive administrative headache.

“Landlords don’t want to open their books to the ‘lease police’ who are coming in to dispute charges,” said Stephen Messinger, a lawyer with Minden Gross Grafstein & Greenstein, Toronto. “They say it’s an administrative nightmare. But the fair exchange of information — including market research — would be beneficial to both sides. Would it be so bad if the landlord allowed the tenant, with notice, every two years, to audit the books?”

Can’t we all just get along?
Among other solutions offered in the debate over charges have been caps on expenses, fixed CAM charges and gross-rent arrangements, which give tenants some certainty about occupancy costs. They also simplify the negotiation and administration of all leases, consequently reducing disputes over billing.

“Someone looking for errors will find them, and the assumption is that they were maliciously done,” said Zoba. “But if you’ve got thousands of tenants with different lease forms and a 24-year-old junior accountant administering them all, it’s almost inconceivable that the landlord could correctly incorporate all the changes for each one.”

In this case, simplicity could be a virtue, agreed Shedlin. But he advises landlords offering fixed CAM charges to protect themselves by building in some incremental increases and some provisions for unanticipated, uncontrollable price spikes, such as utilities, insurance and snow removal.

Tenants, for their part, are increasingly seeking to protect themselves from risk, leading to contentious negotiations over shortening the lease term, obtaining termination rights based on sales and having a say over co-tenancy and exclusivity. “What’s important is to deal with it up front,” Shedlin said. “Otherwise, there’s the potential for litigation and disputes down the road.”

Indeed, with this emphasis on communication, open-mindedness and the willingness to compromise, the industry’s legal counselors are sounding increasingly like marriage counselors.

“For win-win strategies, you’ve got to check your attitude at the door,” said Messinger. “There are so many ways to work together for the benefit of both, instead of working at cross-purposes. There has to be a give and take, a middle ground.”

Shedlin agrees. “Neither party should be left vulnerable,” he said. “Each side needs to try to understand what’s important to the other and why, and to be able to give in and build a fair remedy. Deals aren’t done on handshakes anymore, but it’s still a people business, and people can disagree without being disagreeable.”

That approach has been embraced by at least one mall manager, with results that suggest, if not a Garden of Eden, at least some hope for the future of landlord-tenant relations.

“I’m sure plenty of property managers have a long laundry list of complaints, but we’re not adversarial here,” said Brenda O’Quinn, senior mall manager for Hull Storey Retail Group, Augusta, Ga. “I remind myself every morning that my merchants are my customer. If you treat every person with respect, you develop trust, and they are less likely to lash out. They realize you’ll listen to the whole story, think it over and give a fair answer. It’s all in the attitude. If you make the tenants you’ve got happy, they’ll sell the center for you. They’re not on the same side of the team, but it is truly a partnership.”

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