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Real Estate Law | April 2014

Commercial Lease Expenses: Be Careful of the CAM Charges

“Common area maintenance” (CAM) charges are one of the least understood and most expensive parts of a commercial lease. Subtle changes in the language can mean big changes in the amount of rent you will ultimately pay.

In a recent article (“Beware of Total Costs in a Commercial Lease,” January 2014), we explored the multitude of charges and expenses - the “bears under the bed” - that together make up the total check you write to your landlord. We also offered a few tips for understanding those items when evaluating a potential new commercial lease.

This article focuses on the “common area maintenance” (CAM) charges - one of the least understood and most expensive parts of a commercial lease.

In reviewing your new lease, you notice - right after the description of “rent” - a section on “additional rent” that describes your responsibility for paying your pro rata share of CAMs. At first glance, that seems fair enough; after all, the other tenants are paying their share, aren’t they? The problem is, you may not have any idea what your pro rata share is. Which expenses are included? Are they proper? Is there a minimum? A maximum? The answers to those questions can make the difference between a good and bad lease, one with which you be stuck with for the next five years or so.

Your Pro Rata Share

A properly written lease will spell out your pro rata share in percentage terms, but most do not. Most leases will say that your pro rata share is a fraction, the numerator of which is the square footage of the premises you are leasing. But it is in the denominator that your liability can change significantly. It might say the denominator is the total “rentable” square feet; or it may say the denominator is the total “rented” square feet. Before we all reach for our eighth grade math book, let’s simplify this. If your lease says the denominator is the “rentable” square feet, the landlord pays for the empty space. If it says “rented” square feet, you pay for the empty space.

An easy example illustrates this. You are renting 3,000 square feet in a 12,000-square-foot retail center. There is one other tenant, and they have 1,000 square feet. If your lease states that your pro rata share has a denominator of rentable square feet, that means your percentage is 25% (i.e., 3,000 sq. ft./12,000 sq. ft.) and you are responsible for 25% of the retail center’s CAM expenses. But, if your lease calculates your pro rata share using a denominator of rented square feet, your share of CAM charges jumps to 75% (your 3,000 sq. ft. divided by the mere 4,000 sq. ft. that is rented out). Why? Because (a) your landlord stinks and can only rent a third of his center and (b) your lease stinks worse and makes the tenants that are there pay for the empty spaces’ share of CAM expenses. It also means your rent will go up or down with the total occupancy of the center.

What can be done here? First, be careful about signing a lease that saddles you with more CAM charges as the center goes empty. Second, negotiate a limit on the amount that your percentage can increase in a year (known, not surprisingly, as a “stop”).

What Is and What Should Be Included

As alluded to above, the best leases set a base amount for CAM charges and add a stop to keep them from increasing beyond an agreed-upon maximum each year. (Again, most leases do not do that; rather, they are true “triple net” leases wherein the expenses, whatever they turn out to be, are passed on from the landlord to the tenants in the form of CAM charges.) But even with a “good” lease there are some things to watch for.

A typical commercial lease (remember there is no such thing as a “standard lease”) will contain provisions, varying in length from a sentence or two up to a page and a half, which describe the expenses that make up the CAM charges. They can vary wildly. As a tenant, you want your lease to spell out just those expenses that are directly related to the property itself. In reality, you often see expenses with a much more tenuous connection, such as:

  • salaries, benefits, insurance, sick and vacation time for the landlord’s administrative staff;

  • amortization associated with equipment used in the upkeep of the property;

  • recoupment of discounts in CAM charges that may have been given to “anchor tenants” in order to make the center more viable; and

  • a “reasonable” management fee (as decided by the landlord to manage the center)

A word about that management fee. In truth and in fact, it is entirely reasonable for the manager to be paid a fee. It is less reasonable for the manager to set the fee at their discretion (and not even tell you what it will be). But there is a third, still worse, structure: Many leases tie the management fee to the amount of other expenses. They then provide, for instance, “a management fee in the amount of 7% of the other Common Area Expenses.” What has just happened is the landlord has put himself on a “cost plus” basis of compensation. That is, the more expensive the landscapers, the more the landlord makes. Why hire the cheaper janitorial service, when the landlord makes more money if the more expensive group does the work?

Bottom Line

Seldom is the language of the CAM charge provision a “deal breaker,” but you should still pay close attention to it. It is common for a tenant to enter into a lease not understanding the extent to which subtle changes in the language can mean big changes in the amount of rent they will ultimately pay.