Public Improvement Fee

A close relative to TIFs is the PIF (Public Improvement Fee) that I ran into in Adams County, a Denver Metro county. This was an extra 0.5% tax on most sales at the tenants of the center. This 0.5% tax went to Adams County who in turn reimbursed the Developer for redeveloping the industrial area. This is different than the TIF becuase it has absolutely nothing to do with property taxes.

Tax Incremental Financing

Tax Increment Financing (TIF) is a financing and development tool that allows future real property taxes and other taxes generated by new development to pay for costs of construction of public infrastructure and other improvements. Basically, what happens is that the city tells a developer that if they develop a retail center on this old industrial park then the city will for a period of up to 23 years split the tax revenues into two groups. One group is the base tax, which is the tax amount from the previous use, and this tax goes to the proper taxing authority. The second group is a PILOT group (Payments-in-lieu-of-taxes)where the developer is taxed on the difference of the base amount and the current value of the property and that amount gets reimbursed to the developer for the costs of infrastructure (sewers, roads, etc...). In the end, the developer is still getting taxed on the current value of the property; however, the taxes due to the increase in property value come back to the developer as a subsidy. In a deal I am currently working on the tenants in the property which was developed using the TIF approach pass a tax on to the customers that shop at the stores and that small extra tax (0.5% or so) goes to the city for their TIF financing. I am unclear about how the majority of municipalities apply that extra tax, if it is reimbursed to the developer or is an extra tax that the city collects.

Common Area Maintenance Caps

As you read through a triple net lease, consistently you have to jog your memory for what certain lease language means. Hopefully this explanation of CAM caps helps underline exactly what is entailed in each of these terms.

Controllable Expenses - usually the lease explains later on what the controllable expenses are, and good lease language will do that, however, I am writing this because lease language is often very bad. Usually, controllable expenses are expenses that a property owner can control, such as administrative costs, management fees, and Repairs and Maintenance costs. These will change per lease, as there is not a set deifinition in the real estate world, but often the lease will not define "controllable expenses" and this is what I assume.

Uncontrollable Expenses - usually property taxes, insurance, and utilities.

An article that I found on the South Florida market by Scott Brenner said this about controllable vs. uncontrollable, "Controllable expenses are things like janitorial services, management fees, garbage removal, repair and maintenance, maintenance engineers--the costs to run the building. Controllable expenses are everything other than real estate taxes, insurance, utilities and hurricane damage charges."

Cap Types - there are two types of caps: cumulative and non-cumulative.

Cumulative Caps - this means that you can increase CAMs 5% each year. So, in a five year lease you can increase CAMS up to 25% from the base year. Or if in year one CAMS increase by eight percent, you can only increase CAMs by 5%. In year two you can increase CAMs up to 5% on last years increased amount, and so on.

Non-Cumulative Caps - means that CAM costs cannot increase by more than 5% from year to year. Using the same example this means that if you have a five percent cap on CAMs, and in year one your controllable CAMs increase 8% you would only be able to increase CAMs 5%; however, in year two if CAMS increase by only 2% then you can only increase your controllable CAMs up to 2% of last years increased amount (the 5%, not the 8%). In year three if CAMs increase by 3% you can only increase CAMs by 3% on top of the 2% increase from the year before.

Barry Fleischer in his book "How to Lease Space in Shopping Centers" says "Over a long-term lease, the cumulative cap can grow much faster than the actual increase in expenses..." So for an owner of real estate a Cumulative cap on CAMs actually would not be too bad, however, a non-cumulative cap could mean that the tenant will reimburse less than you may accumulate in CAMs.