Show me the Money - Completion Statements for Retail Tenants

Join Gary Marshall in this episode of 'That Retail Property Guy' as he delves into the intricacies of completion statements in retail property management. Learn about the importance of getting these financial summaries correct, the common pitfalls to avoid, and why attention to detail can make a significant financial difference. This episode is packed with insights, all aimed at ensuring you never leave money on the table. Perfect for retailers, accountants, and property managers who want to refine their understanding and processes.

00:00 Introduction to That Retail Property Guy

01:20 Understanding Completion Statements on Leasehold deals

02:49 Common Pitfalls in Completion Statements

05:12 Calculating Apportionments and Charges, 11 fingers!

09:51 Ensuring Accuracy in Completion Statements

14:11 Final Thoughts and Best Practices

14:33 Closing Remarks and Call to Action

Kerching: follow the Money: Series 1, Episode 1: https://podcasts.apple.com/us/podcast/kerching-why-retail-tenants-should-follow-the-money/id1791455767?i=1000684632560

Never miss an episode! Follow and like That Retail Property Guy on your favourite podcast platform - available on Apple, Spotify, Amazon and more.

Find out more and message us on the podcast website

Go to ThatRetailPropertyGuy for more on Gary Marshall, Smarter Estates and the TRPG podcast. You can also check out the TRPG Blog for reading versions of key episodes. 

For our niche 'Accounts Recoverable in Retail Property' business services, visit SmarterEstates

And find Gary and team on LinkedIn for regular updates and community info!

Transcript

0:00

Welcome to that Retail Property guy with your host, Gary Marshall. In each podcast episode, we delve into topics relating to the particular overlap between estate management and accounts payable from the perspective of a retailer as tenant. There's a famous movie quote from the Tom Cruise film, Jerry McGuire, where he shouts, show me the money. Of course, in that film, he's emphasizing his outrageous demand for a significant salary package for his client,. A sports superstar demanding proof of a big number that cannot then be withdrawn. But this phrase has echoes in the property world too. So in this episode, let's cry. Show me the money as we discuss completion statements, whether that's a lease renewal on disposal, or an acquisition. And okay, it's not very Hollywood. There's nothing sensational about doula's, dishwater completion calculations, except maybe if the bottom line of the statement is a transfer of funds totaling six or seven figure sums, a million pounds, does that get your attention? Great. But what if it should have been 1.1 million? Are you missing a trick? Are you leaving money on the table? So let's pay attention, sharpen our pencil, get everything that's properly due to us, the devil, as they always say. Is in this detail. Let's start with what is a completion statement. I mean, generally speaking, it's a financial summary of the funds that one side will pay to the other at the moment of completion of a deal. If you're buying a house, it could be pretty simple. The agreed purchase price. Minus the deposits and possibly plus or minus the solicitor's costs and the mortgage fee. And once paid over, you could assume that's it. Deal done. Funds paid full and final settlement with no chance of a follow-up claim. Close the file. In commercial property, it could also be a few simple lines, even on a really big acquisition deal, but it's also common for commercial, especially leasehold completion statements to get a bit leggy, to run to dozens of lines covering various periods of rent or service. Charge interest insurance, capital contributions. And that where applicable part of this is the urge for transparency. The two parties need to check and agree the statement, so it makes sense to be clear about each component to avoid any sticking points. Okay, so let's show the actual invoices to be settled. Let's show the apportionment of any overpayment to be credited back the split between rent and service charge. Don't lump it all into a sweeping gesture. Let's show the working out, and then the total sum at the bottom will be much clearer, easier, but it's quite common for there to be differences of opinion that might need further debate. I've seen so many examples where one party to a lease renewal thinks the completion statement is a simple reckoning of just rent due. While the other thinks it's an opportunity to resurrect every historical, disputed, minor service charge or insurance balance, and uses the commercial pressure of the impending deal to coerce the other party into settling a completion statement for items that they really don't recognize or know much about. But time is ticking. The completion deadline is upon them. The operations team or the bank manager are eagerly awaiting confirmation that the deal is done. So there is a pressure to agree to accept those minor items. Sorry, what were they again? Were they important? Maybe in the moment they lost a bit of priority, but in the bigger scheme of things, this is creep. It undermines important financial controls. It allows wastage disrespecting the essential task of cost minimization in short lost profit. So cutting corners cost cash. Oh, but here's a thing unless specifically stipulated to be. So a completion statement generally isn't binding. It isn't full and final. It can be revisited after the deal is done. Many property professionals are surprised by that. Of course, it can be binding if associated documents say it is. And even if it isn't binding, it can be really difficult to chase down another bite of the cherry if the CS was wrong. So best to get it right first time. But what does that involve? Is there an industry standard for completion statements? Is there a governing body to ensure everyone plays nicely well, as you might guess? No, there isn't. It's up to us as we conclude our negotiations to agree that final step, who is going to pay what to whom? First advice, obviously is to know what you're talking about. If you aren't familiar with the accounts function for your property or business, then maybe don't assume to handle the preparation of the completion statement. Check with the accounts team. Ask if there are any ongoing factors, ongoing disputes, ongoing reasons to not agree with the other side's claim. But even if you are the accounting wizard. Tread carefully. Count on your fingers. Make sure the other guy is using the same tally. More on this later. For now, let's assume we're talking about completion statements between tenant and landlord when a new lease is about to be completed. Maybe that new lease is a renewal of an old lease. Maybe the effective date isn't today. Maybe it's backdated, so some period of rent and other charges need to be calculated. Maybe the rent is actually quite simple. Maybe it's the service charge that's complex. Maybe the old lease that's the one being renewed had a checkered history where the landlord billed items that the tenant disputed or paid short or even overpaid. Maybe the landlord held back some year end refunds or some reconciliations. Maybe there's a service charge balance yet to be concluded. Who said lease accounting was simple? Maybe some charges cover only parts of a regular payment period. It is not uncommon for a lease to stipulate quarterly charges, but for completion to occur mid-quarter. Is there a standard industry-wide protocol for calculating apportionments of periodic charges? Eh, of course not. That would be too easy. The apportioned sum must be agreed, but there can be several ways to get to that conclusion. A simple method might be one over 3, 6, 5. This is a fairly blunt instrument dividing the annual charge by 365. That's days in a year, 366 in elite year. Of course, then multiplying that day rate by the number of days to be charged. But even this might not progress smoothly. I've seen completion statements prepared in Excel where somebody calculated the number of days due by simply deducting. One day from another seems obvious, but the result of that sum would be one day too few forgivable, perhaps for an inexperienced newbie, but sneaky. If your experienced landlord is retaining an extra day of rent credit, check the Excel formulas count on your fingers If necessary, the Excel formula should be something like B minus a plus one. And did I mention counts on your fingers? Have you ever noticed that some managing agents seem to have 11 fingers? It's an old joke. The explanation is a bit of a trick. Hold up all your fingers. Go on, do it. Do it now. Now count down. 10, 9, 8, 7, 6. Remember that number six. Now, how many fingers on your other hand. Five. Okay, so six plus five is 11, right? Okay. 11 fingers is a crass way to highlight the problem, but we regularly see this in apportionment calculations where an agent reaches a conclusion that two parts of a period add up to more than the simple period should. Let me explain. Let's say service charge is payable quarterly, A yearly sum divided by four gives us those quarters. But notice that none of the traditional English quarters or their modern or Scottish equivalents are actually 91.25 days long, and in case you're reaching via calculator, that's 365 divided by four is 91.25. If you count the days in a quarter, you can see that the March quarter. That's 25th of March to the 23rd of June. Inclusive has 91 days. The June quarter, which runs 24th of June to 28th of September, inclusive has 97 days while the September quarter itself, that's 29th of September to the 24th of December, has just 87 days. And the December quarter, which runs from Christmas Day 25th of December to the 24th of March the following year has 90. So this makes complications and we need to do the tricky bit. If you divide an annual charge of say, 10,000 pounds into quarters, each quarter should be two and a half thousand pounds. As the meercat say simples. But if you divide it by 3, 6, 5, you get a day rate of 27 pounds, 40, and if you multiply that by the June quarter of 97 days, you'd arrive at a sum of 2,657 pounds, oh and a TP, which is different, so like 11 fingers. It's just another way of assessing a sum and arriving at a different answer. And the bigger the underlying values, the bigger the impact. I've seen landlords even suggesting a mix and match of methods across different date ranges, where interestingly, each different method seems to be to their advantage. While a simple one over 3, 6, 5 benefits the tenant. But like we discussed earlier, there's no industry standard. There's no regulatory body insisting on a preferred basis. You need to pay close attention to the method and make sure you're not being taken for an 11 fingered fool. And hey, if the other side compiles the completion statement in Excel, also pay attention to the actual contents of each cell. I'm not referring just to the number you can see, but to the formula that creates it. And not just the formula for counting the days, but the underlying arithmetic of all the values. I've seen examples where someone created a lengthy spreadsheet in Excel, many rows with loads of similar looking columns, all with a formula calculating the data from other cells, except the formula in one cell had been overwritten with a fixed value. You could change some of the source data. Say you need to amend the completion date, and all of the dependent cells would refresh with new values except that one. So the sum total at the bottom of its column wrong and the VAT calculation wrong and the sum recoverable to the tenant wrong. I've seen examples where someone used a certain logic across most of the rows, like every credit that should be returned to the tenant shows as a negative or in brackets. But suddenly they added a further row where that logic was inverted. The result appeared as positive, so in the sum at the bottom, it reduced the overall total due back to the tenant. Easily done, not necessarily devious or deceptive, but whether the numbers are small or as big as phone numbers. A small discrepancy like this can skew the outcome against the tenant or against the landlord, of course, in which case a scrupulous tenant would immediately point it out. Okay. You might chuckle at that. Would anyone actually point out if the other side had made a manifest error in their own calculation to their own detriment, that meant they were outta pocket? As we mentioned earlier, not all completion statements are full and final settlements. They're not necessarily binding. So if you are gonna be having an ongoing relationship with that other party, maybe it's best to point the error out now, get a brownie point, avoid it being revisited later, do it once, do it right and all that. So where does this get us? We know the terms of our deal. We know the dates, we know the values, we know the obligations. We verify the Excel formulas. We sense check the direction of travel. That credits should come back. We agree the apportionments of any part period, using whatever apportionment methods seems best in the circumstances. We recognize and agree those. Are the lines that get thrown in. We don't just accept them as any rubbish being thrown in at the last minute, or we agree to exclude them so we can complete this bigger deal without further delay and revisit those items later. We agree if the completion statement is full and final, perhaps we're settling up a Dilapidations claim once and for all, so we don't want a second bite of the cherry. We exchange covering letters or emails, so the existence of the completion statement is unarguable. We archive a copy securely in our property docs archive for future reference in case anyone does try a sneaky second bite. Alden well. Maybe except perhaps just one more thing. Show me the money. Don't forget to collect the funds. The final stage of any completion statement is to follow the money to ensure it's collected or paid, that it's correctly allocated according to the completion statement. Even if that means many lines of inputting for the poor Clark in accounts, the devil is in this detail and your prophet follows quickly behind. You might scoff, but I've witnessed many occasions when a retailer has completed a deal. Agreed, the completion statement, signed all the documentation, updated the database. Somehow neglected to collect the actual dos. It's a whole other episode in this podcast, but I once uncovered a bunch of completed deals where the client retailer was a knowingly short by more than one and a half million pounds. A simple yet broken process. A lack of communication meant that invoices hadn't been issued. Lawyers hadn't been nudged and the landlords had sat on these funds for years, possibly secretly hoping that nobody would ever notice. One landlord actually wound up their business in the interceding years, so that fish got away, but it could have been worse, I suppose. So in conclusion, pay great attention to completion statements, verify each sale each number, each date, and follow through to seeing the cash in your bank. Or paid out and allocated to your instructions if you are not the best person to compile or check the statements. Get help from somebody better disposed. Don't cut corners.

Simon 14:34

Thank you for listening to that Retail Property guy. I hope you enjoyed today's discussion and found it both entertaining and insightful. Don't forget to explore more episodes and if you have ideas for future topics, feel free to share them below. If you enjoyed the show, please consider leaving a review. Your feedback is greatly appreciated. Be sure to like, share and subscribe so you can never miss an episode. For more information, visit that retail property guy.com. Thanks again for tuning in.