As a commercial tenant, it’s vital that you know your lease language.
Beyond how much you pay in rent, there are a number of costs associated with your lease. One such cost is Common Area Maintenance or “CAM,” which deals with the cost of, among other things, maintaining the property. Typically, CAM expenses are spelled out explicitly in your lease and passed from landlord to tenant.
The CAM language can often be complicated and confusing to grasp, with several variables being taken into effect. As a result, it can be challenging to identify if landlords are charging tenants more than their fair share as stipulated in the lease.
Tenants who skim over the fine print can be stuck with a large bill that can affect their bottom line for years to come. If tenants catch unidentified fees during a lease audit, disputes with landlords can be costly and frustrating.
Commercial tenants should negotiate CAM charge provisions with their landlords to protect their profitability. However, many do not, and end up paying more in the long run. Don’t be frivolous with your money.
If you’re a commercial tenant, there are a number of red flags to look out for when it comes to reconciling CAM fees. Here are some tips for identifying them and protecting your bottom line.
CAM Reconciliation Errors
Common Area Maintenance fees can be an especially murky subject for tenants. These are charges landlords include in the lease to help offset the cost of maintaining the property and its surroundings, such as common area lighting, landscaping, snow removal, and parking lot maintenance.
More often than not, CAM costs are passed on to tenants, who share a proportional burden of these expenses. Traditionally, landlords and property managers estimate CAM expenses for the whole property at the start of each year based on prior years’ expenses, or the property budget.
Because these costs are based on estimates, landlords need to reconcile the monthly CAM payments against the actual costs incurred at the end of the year. It is important that tenants review these reconciliations carefully, as errors do occur.
Capital Expenditures Pass Through
Capital expenditures can be a point of disagreement between commercial landlords and tenants. Some landlords may require tenants to pay for certain kinds of capital improvements, while many tenants argue that these expenses are part of an owner’s investment in their property and, therefore, not their responsibility.
Given the grey area, landlords do sometimes pass on larger capital expenditures to tenants. It’s reasonable for a landlord to include routine replacement of light bulbs for a parking lot as a CAM expense; but larger projects, such as the installation of a $75,000 LED lighting system, for example, is a capital expenditure that, in most cases, cannot be passed through to the tenant.
Other examples of expenses that could be passed through incorrectly include roof replacement, major asphalt repairs/replacement, structural repairs, painting, and costs of renovating or repairing vacant units.
Transparency over what your landlord should or should not be passing through under CAM is important. Often times, CAM expenses are clearly defined in the lease, along with exclusions. If there are certain expenses not stipulated in the lease, tenants can make a case for whether or not they should be excluded.
Reconciliations should be reviewed carefully to ensure the landlord is not passing through expenses that are to be excluded per the lease. Some typical exclusions include mortgage payments, leasing commissions, and attorney fees, which are more obvious.
However, other exclusions are easily overlooked. These include services performed for a specific tenant, or repairs that are reimbursed through insurance proceeds or other third party.
Controllable vs. Uncontrollable
Controllable expenses are those that the landlords can control through competitive bidding.
Uncontrollable expenses are those that landlords cannot negotiate. They typically include things like property taxes, utilities, snow removal and insurance.
Tenants can negotiate caps on annual increases in controllable expenses. Cap provisions can provide a ceiling on how much landlords can charge in CAM fees as well.
“If we find issues with these caps, the tenant may save in the future. Depending on the language of the lease, tenants may be entitled to collect from past year overcharges as well.” says Krista Mannion at Leasecake.
Given the variables and unpredictability surrounding CAM expenses, an alternative suitable to both parties may be to negotiate a “fixed” CAM with set annual increases and no requirement to reconcile at year end. This allows the tenant to plan and budget appropriately.
However, one disadvantage is that if the expenses are lower than the fixed amount, the tenant may have no rights to recover the overpayment.
CAM Reconciliation Solutions
At Leasecake, our team of real estate experts is available to help with CAM Reconciliations as part of our professional services offering. We will review the terms and conditions of your lease documentation and compare it to what you’re being invoiced, ensuring that you are paying your fair share of expenses as spelled out in the documents. Instead of engaging landlords directly, we provide you with the talking points you need when engaging your landlord to dispute and/or collect any overages paid.
When it comes down to lease compliance and profit management, reviewing these charges and ensuring they adhere to the terms and conditions of the lease is critical to successfully managing your locations.
We’d love to help. Get in touch!