If you dread your annual CAM reconciliation, you are not alone. While at one time in the history of retail, CAM charges were a fixed expense, now landlords pass increases in operating changes through to you, making the billing and reconciliation process more difficult to navigate.
First, let’s take a minute to understand CAM – or Common Area Maintenance. A CAM provision requires a tenant pay a pro-rate share of expenses that are included by the property owner for the operating and maintaining of the shopping center – or building. Items commonly included are parking lot repairs, utilities, landscaping, interior/exterior repairs and cleaning, insurance costs, etc.
As a tenant, you have a right to audit your landlords calculation of CAM to ensure you are being billed correctly. To help make the process simpler, it’s important to be aware of some key ways that retailers leave CAM reconciliation money on the table.
Pro Rata Share
Most retail leases will state that your pro-rata share of CAM expenses is a fraction. The numerator is pretty straight forward—it represents the square footage of the premises you are leasing. However, make sure you understand how the space is being measured—i.e. does it include the walls, or not? Where things get more challenging is understanding the denominator, which can greatly impact your liability. Therefore, it is very important to make sure you understand the definition of the denominator in the calculation. It can be “leased”, “leasable”, “occupied” or “existing” floor area/building space, and these variations can result in big
differences in your pro-rata share of expenses.
To help manage your costs, be careful about signing a lease that increases your share if other tenants move out—and consider negotiating a limit on the amount that your percentage can increase in a year.
Is your landlord charging for capital expenses which are disallowed in the lease? Are any of the intentional or overdue improvement/repair costs being passed through to you actually the responsibility of the landlord? Did the repair/activity benefit all the tenants as part of maintenance OR is it a situation where the landlord unilaterally decided to make changes to the property that benefit a particular tenant or constitute deferred maintenance.
Errors often occur due to the inclusion of expenses that are outside the scope of “normal repairs, maintenance, and operations” and therefore are not legitimate pass-through
expenses, so it’s critical to monitor all capital costs that are being passed through.
Your lease’s operating cost clause defines the costs passed through to you—but too often landlords set a blanket formula across all their tenants. You may have negotiated more favorable terms, including certain exclusions such as initial land costs, refinancing costs, costs incurred for specific tenants, interest or penalties incurred by the landlord, etc.—so make sure your lease language is being followed.
In some cases, you have negotiated the direct payment for some services—such as utilities. However, you can’t be assured that our landlord is taking that into account under general utility costs. Ensure that you are not being double charged for any services you pay for directly.
One way to minimize the risk of high CAM costs is to negotiate a cap on the amount you will pay for certain items within CAM, or for the entire CAM expense. A CAM cap limits the amount by which your share of CAM costs can increase above the initial charge. Negotiating caps can take some pressure off the initial negotiation process and can help you avoid disputes at year end.
Need help ensuring you aren’t paying more than you should? Schedule a demo. We’ll help you make sure you don’t pay more than you should.
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