June 27, 2016 | James Massey
6 Tenant Allowance Negotiating Strategies and How to Ensure Collection
Don’t let dollars slip through the cracks – a little planning will ensure you get your funds
Some time back in a previous role, one of my sharp paralegals was working on an estoppel and realized the company had not collected $500K in Tenant Allowances for a new store. Thankfully, we got our money, but fearing where there’s smoke, there may be fire, we dug further and found another $4.5M outstanding! We were successful in collections, but as some amounts had been outstanding for a long time, we felt there were gaps in our process, and examined how this could happen. How could “free” money go uncollected, when it’s already agreed that it’s owed to you?
We discovered that we had very tight processes within clearly defined tasks of each role in Real Estate and Construction, but there were breakdowns in two places; activities in the Development department handoffs, and outside of Development when the project was turned over to Accounting for set up.
To fix any complex problem, you must examine the entire process, so I usually look upstream of the activities to discover the root of the problem. As Abraham Lincoln said “the best way to predict your future is to create it”.
Whose job is it anyway?
If you haven’t played Broken Telephone, let me describe the game for you. Someone tells a story and they tell it to the next person (and so on). At the end of the chain, the last person’s version tends to differ materially from the original story.
In new store projects, Real Estate negotiates the deal, defining the scope of work, who pays for what and the process of getting reimbursed. This is the first point of exchange - between the Landlord to the Rep regarding who is to do and who is to pay for specific tasks, which may not be the same party. At this point, it’s important to consult with your Construction team to be sure you’ve fully defined the project Scope of Work (SOW), then use your system to assign responsibility for each item that is contractually required.
When the Construction team takes over they know the SOW, but a clean hand-off should include any details the landlord needs per the agreements to ensure collection of your Tenant Allowance. Does the landlord want drawings? Separate billing? Other proof of work?
Knowing all requirements and capturing them in your Strategic Store Lifecycle Management (Strategic SLM) solutions ensures visibility of duties and greatly simplifies later efforts.
You might even create a document folder specifically for this detail. During the project, if issues arise that require amendments to the SOW, be sure your process includes updates to your Strategic SLM solution.
Development doesn’t stop when the store opens; projects have to be closed out, including amounts to be collected. This is where monies are most likely to get forgotten and lost. Why does this happen? Chances are good that Real Estate has been out of the picture for more than a year at this point – so unless there is good communication and continuity, the tenant allowance may get overlooked. On the construction side, they often see this as an admin function, and don’t feel it’s their responsibility to follow up. And the Admin team, faced with gaps in information, struggle to determine how much is owed and to acquire the detail they need to collect. There’s an old saying, “the most faded ink is better than the best memory.”
Looking for a metaphor, I found that about 20% of fumbles in football are unforced (i.e., completely within their own team). These are professionals that have been playing nearly all their lives and practice almost every day. How much greater is the burden on your team to avoid dropping the ball, given completely different disciplines, geographic differences, and unique contractual agreements? Most Admin teams are exceptionally diligent, but why does it have to be hard? What can you do to simplify the process while preserving economic value in your deal?
It all starts at the beginning…
While a good Strategic SLM solution can handle the most complex SOW, why not intentionally make it as easy as possible? There are a number of things your Rep can do during negotiations to make collection of the Tenant Allowance easier. Landlords won’t agree to all of them, but some will and there are lots of options.
Convert the Tenant Allowance funds into a rent reduction – the easiest way to solve the problem is to avoid the situation altogether. And, with step increases, the savings compound over time.
Have the landlord do some work (e.g., electrical upgrades) so you don’t have to collect. While this introduces schedule risk, it keeps the money simple. Make sure there are deadlines for performance.
Eliminate billing analysis by agreeing to a defined amount rather than “actual cost with a cap.” If you can reasonably estimate the cost, you might be better off to risk a small cost overage, rather than calculating and documenting a larger amount.
Do not agree to any restrictions on where money can be used. Your rent was calculated assuming the landlord will pay the full amount. If they worry about paying and then being stuck with liens, argue that you must release liens anyway.
Set a time by which you must be paid. If you have not collected, make sure you can withhold rent to reimburse yourself. Set a deadline in your demand letter.
Make payment due upon term start. In my story above, half the amount owed was collected just by requesting it! But since even simple request letters can fall through the cracks, an automatic trigger saves effort.
Perhaps the last resort is to make it someone’s problem. Have Accounting book a receivable for the funds; this way, there is a reportable record of the amount owed and someone can be tasked with collection. No manager wants to face writing off large amounts, because no one followed up. Lastly, use your Strategic SLM system to create a Tenant Allowance report. You certainly captured the Allowance amount in your site approval; use that data to validate performance.
Tenant Allowance funds often help make your deal economics work, but only if you collect. You spend so much energy combing other costs out of your project – make sure you post favorable results with allowance funds that are easy to collect.
To read more about how Tango can help connect the entire store lifecycle process and making tracking of items such as Tenant Allowance more efficient, download Lease Administration datasheet.