Be Aware of ‘CAM’ Expenses

By Randolph T. Mason, CCIM, SIOR, Partner, Commercial Realty Specialists: Occasionally, a landlord may attempt to use the common area maintenance expenses as a profit center. It’s not uncommon to have the tenant reserve the right to audit the landlord’s expenses.

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Occasionally, a landlord may attempt to use the common area maintenance expenses as a profit center. Now we all know, that the operating expenses are clearly that; an expense to run the building and should not be used to increase the internal rate of return for a property owner.

What this ‘’CAM’’ provision requires is the tenant to pay its fair and prorate share of the operating expenses incurred by the landlord during the operation and the maintenance of the property. Unfortunately, some landlords may have expanded the list of expenses to include every imaginable expenditure for the property. The provision should only pass through to the tenant legitimate expenses relating to the operation and maintenance of the property.

Prior to signing a lease, a prudent tenant should carefully review the history of the buildings past three years of CAM charges. What this really does is enable the tenant to compare the amount of expenses to their annual increases as compared to other buildings in the market to determine whether they are reasonable, as well as to estimate what charges might be expected in the future.

The CAM provision and lease should be written so that only legitimate common area expenses are included. Capital improvements and compliance cost should be excluded from the calculation. Most legitimate landlords will accept what has become known in the industry as a “standard list of operating expense exclusions”.

Particular attention should be given to the definition of the ‘’base year’’ which requires the tenant to pay its prorate of share of expenses incurred over its base year. It is common practice for the tenant not to pay any of its expenses during the base year period. Also, the base year variable expenses need to be grossed up to reflect the full amount of operating expenses should the building be 100 percent occupied. By way of example, if a building is 50 percent occupied, the base year would be lower for items such as electricity and janitorial expenses.

Once the property becomes 100 percent occupied, those expenses would increase, subjecting an unfair burden to the existing tenant. It’s not uncommon to have the tenant reserve the right to audit the landlord’s expenses and review the landlord’s calculations within a reasonable period of time. When a landlord has legitimate expenses, it’s reasonable for the tenant to help pay for those expenses, after all, if the property is maintained well, all parties will be satisfied.