By Abe J. Schear
As published in Shopping Center Business 

A decade or so ago, an anchor store was generally thought to be at least 50,000 contiguous square feet of retail floor area operating under one trade name. This definition, while certainly modified to meet the vagaries of the project, was usable as a general frame of reference. This is hardly the case today.

Two generally unrelated goals seem to have jointly precipitated this change. First, landlords are more anxious either to have an annual predetermined increase in additional rents or to have increases in charges capped, not to increase at a rate greater than as set forth in the lease. Secondly, landlords are more reluctant than ever to allow CAM audits, particularly those conducted by audit services.

Simultaneously, tenants have been willing to trade a more formulaic approach for a more readily predetermined schedule of rents. This surely seems reasonable. However, the various definitions of anchors (and the like) are still utilized when determining other pass-through charges, particularly the tax charge.

In tandem with the changing definition of the anchor is the increased use of "variety and specialty store," which is regularly agreed to be in the 10,000- to 20,000-square-foot range. Variety and specialty store has the same general impact as the anchor store, i.e., the square footage, when determining the charge denominator, is deducted from the gross leasable area of the project.

What alternatives are available to the landlord and the tenant in light of this emerging change?

FROM THE LANDLORD'S PERSPECTIVE

• What year should be the base? In a new project, the base year should often be the second year, for this is the year when a full allocation of charges actually comes on line. If the landlord caps the first year, and then has predictable and extensive second year increases, the landlord will forever be chasing its economic shortfall.
  
• What should happen in the event there are options? Often, the "cap" language is drafted in a manner that the increase will continue from the initial term through the first year of the option (and onwards). Generally speaking, this is incongruous with the initial goal of predicting charges. In the scenario of a lease with an option, normally the tenant agrees that the charge in the first year of the initial term will be at (or near) 100 percent of the actual cost. The goal throughout is predictability and, in this vein, the landlord has every reason to expect that the charge should be re-calculated in the first year of the option (and in the first year of the subsequent options, if any). Surely, the tenant can request information prior to the exercise of the option and therefore have knowledge of the charge prior to inception of the option term. Another answer can be found in splitting the shortfall; but lengthy terms with caps (and without recalibration) can be very expensive to the landlord as well as detrimental to the maintenance standard of the center).
  
• What about the right to audit? Given that the tenant is agreeing to a cap, or in some cases to a predetermined increase, it stands to reason that tenant's right to audit can be eliminated. This will surely be a savings for the landlord, at least in its time management. More and more leases are providing for predetermined increases, ignoring the entire concept that the money ahs to be spent in any specific manner. Thus, the landlord has an incentive to make a profit on this charge, particularly since costs will not be subject to tenant review.
  
• Similarly, in the event of a cap or, particularly, in the case of a set increase, there should be a review of the reason for CAM exclusions. If the tenant is not going to audit the charge, and if the tenant is satisfied with the increases, the issue of exclusions and control is, for the most part, no longer necessary.

FROM THE TENANT'S PERSPECTIVE

• When dealing with CAM cap, make certain that the first year's charge is capped. Simply knowing that your annual increases are capped may not be enough if your first year charge is significantly higher than expected. While the landlord may not be able to accurately predict the extent of the first year charge, it is possible, in many cases, to note that the first year (i.e., the first 12 months) will not exceed 110 percent or so of the predicted amount. The goal here is to have a nearly accurate and predictable charge.
  
• If the landlord has dual definitions of "anchor" stores and "variety and specialty" stores (and particularly in instances when there could be a number of 15,000-plus square-foot tenants) some landlords may be willing to cap the number of tenants which will be deemed to be "variety or specialty" stores. If a center has six of these tenants and the landlord is limited to excluding two, this would be a gain for the tenant, particularly on taxes. Alternatively, an approach of ten successfully applied is to simply allow the landlord, in addition to the anchor stores, to either exclude a number of tenants regardless of size or, in the alternative, simply agree to pre-designated minimum denominator regardless of lease-up and regardless of exclusions.

Alternatively, the tenant could insist upon there being no future "variety and specialty" stores, only future anchor stores, thus reducing the potential downward spiral of the denominator.

• If the landlord is willing to cap the charge, particularly if it is the result of the lower denominator and the loss of the right to audit, the tenant needs to carefully focus on whether the maximum increase is cumulative or non-cumulative. Even if it is cumulative, it is useful to require a ceiling, to provide that the charge can increase (for example) at "a cumulative rate of 6 percent per year, but not by more than 9 percent in any year." Again, the tenant has some ability to control the upward spiral and the landlord has more flexibility because the cap is cumulative.

The change in the definition of an anchor and the resulting pressure on the denominator is, like most lease issues, economically driven. Rents are as critical to the landlord as predictability of increases are to the tenant. In deciphering changes in the lease, if you keep your eye on the dollar, sense can be gained from the text.

This bulletin was prepared by the law firm of Arnall Golden Gregory LLP. It presents information on legal matters of general interest in summary form. This document should not be construed as legal advice or opinion on specific matters.