Expert: Jim Avancena, CPM - 1/7/2008

Question
QUESTION: What specific expenses should be included as Common Area Maintenance and which should be excluded?

ANSWER: Tom:
The specific expenses included as CAM Expenses will be different depending upon what type of real estate product you are leasing your space; that is, an office building, retail store, shopping center, flex space, etc.   The best place to start to make that determination is with the specific text in your lease which defines the expenses you are required to pay.  

Some leases are unfortunately quite vague and can say something like: "expenses included as CAM expense shall be the cost incurred by the landlord for operating the (building, store, shopping center, mall, etc.), and expenses become whatever the landlord wants to include as CAM expense.   Other provisions are very detailed will include a long list of very detailed costs such as: "CAM expenses shall include costs incurred for management fees, trash removal, snow removal, re-stripping the parking lot, on-site personnel maintaining the property, real estate taxes, electrical consumption for lighting the parking lot lights, etc.....

There are many CAM expense bills sent to tenants that are incorrect.   This is because most landlords are confident that most tenants will never go to the effort or expense of requesting an audit of the property expenses that support the bill that the landlord has sent the tenant.

If you have a lease that gives you the right to audit the landlords records that back up the CAM bill you have received, you can notify the landlord that you intend to audit his accounting materials regarding those charges and when his bookkeeper has them ready, go into his office and review the records.

If you have a friend that is an accountant or bookkeeper, ask them to review the materials for you.   They will know what looks correct and what may be over-reaching.

If you have a bill for CAM expenses that reflects a major increase in costs over the previous year CAM cost it may be wise to review the supporting records.

The sad fact is that I could write a book about all of the different ways that your CAM expenses could be inflated.  The ways this can happen is endless.  Some of the worse cases involve landlords that are actually using CAM expenses as a way to create additional income unrelated to CAM reimbursement.

I have seen a landlord charge 100% of the expense of two snow blowers to four separate properties!  In other words they attributed the $1,900 cost of two snow blowers to four different properties and they reimbursed themselves  $7,600 dollars thru CAM bills to tenants after spending only $1,900.   Each time a tenant wanted to see the invoice for the $1,900 assessment to their shopping center for the two snow blowers, the landlord simply used the same bill to justify the charge at all four properties!

Many landlords charge the costs for vehicles used by management to the tenants.  Many pickup trucks with the management company's name printed on the doors generate gas charges to distant vacation areas that the tenants reimburse.  One landlord had two pickup trucks whose expenses he charged to both the tenants in his shopping center and as expenses for his construction company.  He assessed the monthly leased cost of both trucks, repairs, fuel, and even traffic violations to the tenants at the properties and included the same costs in his construction contracts.  He also charged the cost of the shopping center janitor - #8 hours per day - to both his tenants and to his construction contracts.

Capital expenses - especially for "replacements" - are a major source of overcharges, so be certain to check single large expense items very carefully.

Many landlords do not pad their expenses, but do not think it is unusual to see overcharges included in your bill.  The problem is that it is very difficult to prove that you have been billed incorrectly.  The place to start is to read the precise language of your lease regarding what can be assessed to you as a CAM expense and see if that language is precise enough to determine what particular costs can be assessed as CAM expense.  If the text is vague, you make have a problem proving the landlord is overcharging you.

Good luck.


-Jim


---------- FOLLOW-UP ----------

QUESTION: Jim,
Thank you for your helpful answer.  As a follow up, I am a landlord on a multi-use retail/warehouse building.  I have a prospective tenant who is offering a lump sum rent, but will pay his own utility expenses.  I am willing to accept the gross lease but I wish to break out the CAM charges so that I would be reimbursed in future years for unexpected or unanticipated increases in CAM expenses.  If I sign a gross lease, is it acceptable to include property taxes in the CAM portion of the rent in order to be reimbursed for any increases in the future.  This would, in essence, be a triple net lease under a different format.

Answer
Tom-
It is acceptable to include property taxes in the CAM portion of the rent in the future as long as the tenant clearly understands that increases in property taxes will be included in the CAM reimbursables in the future and how the charges will be computed.  

Nominally the reimbursables can be called whatever the parties want to call them; i.e. Gross, Net, etc., the important thing is that both parties understand precisely which expenses will be reimbursed on a net basis, and exactly which expenses will be assessed reimbursement only above a base amount and what the base amount will be.

I hope I understood your question the way you intended.  

Best wishes.

-Jim