Expert: Jim Avancena, CPM - 2/5/2008

Question
QUESTION: Jim,

Hi there, I see that you have answered similar questions in the past and hope you may be able to help with our problem.

We are at the first reconciliation of CAM charges with our landlord / property management company, and in our audit we have found that they are adding a line item for "Management Fees" and this is the single largest charge in the CAM expenses for the year...

In addition, there is a provision in the lease stating that the landlord is to recover their indirect costs by a 20% multiplier on top of all CAM charges.  Here's the rub, they are applying this 20% multiplier to this charge for "Management Fees" as well.  Basically they are paying themselves 20% over what they are paying themselves to cover the "indirect costs" of paying themselves...

This seems fishy to me, the charges themselves AND the 20% multiplier - shouldn't the "Management Fees" for the property management company be paid for by the building owners?  Or come out of the rent, not out of tenants pockets?  Management Fees do NOT seem like a part of "Common Area Maintenance".

They are arguing that the line reading "all costs and expenses of personnel to implement the foregoing services" is what allows them to add this charge.  I feel that as they are not the ones actually physically "implementing" the services, this does not apply, and that as they are to recoup their costs by the stated 20% multiplier, they should not be able to charge this "management fee" to tenants.  I doubt they can provide receipts or a direct accounting of the time spent for this line item charge.

Here is the specific language from the lease agreement, sorry it is so long, please let me know what you think.

  COMMON AREA MAINTENANCE:
  (a)   Landlord shall maintain and repair the common areas and facilities of the Shopping Center, including, without limitation, the automobile entrances, exits, and driveways and parking areas, pedestrian walks, landscaped areas, service areas, building exteriors and roofs. Landlord shall use its reasonable efforts to keep the parking area illuminated and agrees to keep all common areas swept and in a neat, clean condition. Said maintenance and repairs shall include all repairs and replacements and the supplies and materials therefor, which in Landlord’s reasonable judgment are necessary to preserve the utility of the common areas and facilities in the condition the same were in at the time of completion.
  (b)   “Common Area Maintenance Costs” shall mean all costs and expenses of every kind paid or incurred in connection with the operation and upkeep of the common areas and other facilities within the Shopping Center, including but not limited to: lighting; sweeping; cleaning; snow removal; line painting and other painting; janitorial services; maintenance, repair and replacement of fire protection systems, sprinkler systems, storm drainage systems and other utility systems; security and security systems; insurance; personal property taxes and property taxes; electricity; repair, maintenance and replacement of directory and other common signs; maintenance, repair and replacement of paving, curbs, sidewalks, driveways, planting and landscaping, lighting and sign facilities; resurfacing of parking and drives; repair, maintenance and replacement of exterior walls (including repainting, re-staining, sealing or similar treatment), gutters and down spouts of any building or buildings; maintenance, repair and replacement of roofs and all components thereof; maintenance, repair and operating costs of common malls, interior atriums and other interior areas, including any buildings; maintenance, repair and replacement of any public address, loudspeaker or music system; all costs and expenses of personnel to implement the foregoing services; rental paid for machinery and equipment to carry out the foregoing services; reasonable reserves for anticipated expenditures, in Landlord’s discretion commensurate with good business practices, such as repair and replacement of roofs, parking areas, heating and air conditioning equipment and other fixtures, furnishings and equipment and the replacement of machinery and equipment utilized to carry out the forgoing services; plus twenty percent (20%) of the total of the foregoing direct costs to cover Landlord’s indirect costs. The cost of the initial construction of the common area and other facilities shall be excluded. Except, as specifically set forth above, structural repairs shall be excluded. Common Area Maintenance Costs shall be made by Landlord in accordance with sound accounting and management practices as applied to the operation and maintenance of like properties. Except for reserves, costs which are capital improvements for accounting purposes shall be amortized over their useful life (as reasonably determined by Landlord), and only the amortized portion thereof shall be included in each year’s Common Area Maintenance Costs. Tenant shall pay Tenant’s Proportionate Share of Common Area Maintenance Costs monthly in advance, on the first day of each calendar month in an amount initially estimated by Landlord as provided in Paragraph 1(n). Landlord may change such estimated amount from time to time."

Thank you for any input on this question!

ANSWER: To the CAM Confused:

You must have leased a store in a shopping center where customers pay admission, since you must have decided it was worth ignoring the CAM text you included in your question and signed this lease anyway.  Either you didn't have an attorney read this lease before you signed it, or you had bad advice from someone.

Rule No.#1 is to have an attorney specializing in Landlord/Tenant ("L&T") law advise you on your lease before you sign it -- only an L&T specialist.

Your correspondence touches on so many of the controversies involving problems with CAM expense charges, and there is so much I could say about your questions that I would need to write a book to tell you everything you need to know about how to protect yourself in this matter.  I will try to be brief in my suggestions and things you can do to determine your position in this quagmire. Let me try to put this in context.

Most tenants have excellent instincts when it comes to knowing if they are being taken advantage of with these overcharges.  They just don't know how to proceed to unravel the specific faults with the charges.

First, before you get too upset about this problem, consider the actual dollar portion of total CAM charges you are actually overpaying.   The total dollars of the overcharges are usually significant, but remember, you are only paying your ratable share of that aggregate charges.  That is important, because if you hired a forensic CPA, top shelf Lease Auditor (Like Landlords, some lease auditors are good, some are poor), or attorney to represent you in this matter, their fee will likely far exceed the amount of your overcharge. This is the reason that most landlords get away with these overcharges, because most tenants grumble about knowing they are being overcharged, but realize the cost associated with hiring a specialist far exceeds the amount of the overcharge.

OK, now lets see what you can do.

In subparagraph(b) of the provision titled "COMMON AREA MAINTENANCE", the first sentence contains the words: "all costs and expenses OF EVERY KIND...".  This is wording that your landlord should have said opens the door for many expenses that are not specifically articulated in the provision thereafter;  notably that the text excludes the words "Management Fees", although I believe this is a weak argument in the case of Management Fee.  I believe that your landlord is 100% INCORRECT suggesting that "all costs and expenses of personnel to implement the foregoing services" is intended to allow him to add in "Management Fees".

"Expenses of personnel" means the cost related to the maintenance staff (on or off-site), perhaps security personnel,etc. that provide services at the property.  This would include their payroll costs, health insurance, etc., but "Expenses of Personnel" does NOT include Management Fees.  Your CAM provision is unique in that it does not specifically have the words "Management Fee" included. My experience is that Ninety-Five(95) out of every One Hundred(100)CAM provisions in leases specifically include "Management Fee" in the text.  This is highly unusual for it to be missing.  The fact that your CAM provision does not include that particular named expense suggests very strongly that you are correct; the Management Fee was not intended to be included in the CAM expenses.

If you were to review leases of the tenants at several similar properties in your area, you will find that their lease CAM provisions specifically include "Management Fee" in the list of included costs. It is so common for the description of CAM expenses to include "Management Fee", that its' absence in your CAM description screams that it wasn't intended to be included.  

Let's move on.

Is the owner of the property you lease related in ANY way to the company that is providing the management services?  Often, when there is an excessive management fee being assessed, the landlord has his own private management company providing the management services under a separate name & entity - or the landlord is doing the property management with his own office staff -- and charging what he determines should be charged.  As you know, this is a conflict of interest.

Far down into subparagraph (b) of your "COMMON AREA MAINTENANCE" provisions, you will find the following: "Common Area Maintenance shall be made by Landlord in accordance with sound accounting and management practices as applied to the operation and maintenance of like properties".  If your landlord is in any way involved with the property management company providing the service, or, in fact he provides the management services with his own office staff, this would make it clear he is not in accordance "with sound accounting...practices" because the relationship of the landlord and property management firm is not "Arms Length", clearly NOT a sound accounting practice.     

The most important evidence however, would be to check with tenants of other similar properties, and ask them the amount that their landlord includes in CAM charges for the Management Fee.  Normally the management fee is calculated/determined in the management contract by multiplying the income collected (the income is mostly the rents the tenants paid) for the property each month by a percentage (%); such as Two Percent(2%), Three Percent (3%), or Five(5%) etc.  The higher the percentage amount, the more you should question the amount of Management Fees that are included in CAM (in your case, I don't believe your provision intended for any management fee to be included or the text would have included those specific words).

Note that the management fee should be related to two important metrics, 1.) "the prevailing fee charged in the industry" for similar properties in your geographic area, and 2.) the actual number of services that the property management company provides.
For example, regarding No.#2 above, there are probably four (4) to twenty-five (25) specific services that can be specified in a management contract as the services that the property management company provides at the property and delivers the owner in administrative services.  The more services that are listed in the contract to be provided, the higher the management fee will likely be.

The major determinate of what is a fair fee to charge for a management Fee is what other property management firms charge to owners of similar properties in your area/region.  This is commonly the evidence referred to in court that carries the most gravity. The
fact is, the number and amount of services should be equally important.  If you find that six (6) other properties in you area all pay a management fee of three (3%)percent, you will have a hard time arguing that you are overpaying for management fees. (That is, if you had a lease that specified you paid for management fees in your CAM costs, you don't.)

One more thought.  Some landlords actually have few management services provided at the property at very little cost - perhaps one percent (1%), but have the management firm pay an additional "advisory services fee" BACK to the landlord of perhaps one to four percent (1% to 4%) of the income each month as a sort of consulting fee.  All the tenants ever know is that they see a total management fee of five percent (5%)assessed in the CAM charges for the Management Fee, even though only one percent (1%)of that 5% total is actually paid for management services.  The only way to make that determination is to review the terms of the actual management contract to see what is says the amount of the fee is supposed to be, or check all the the check stubs paid from the property management firms account or the landlords account to see if any fees where paid to an entity that isn't one of the contractors that you see provided a service at the property.  This is not as prevalent a practice as it was in the past.

You should also know that you have other areas of concern regarding you CAM provision.  Normally you should avoid including reimbursement for anything called a "REPLACEMENT", or "RESERVES" in you CAM provision.  Both of these expressions usually relate to expenses that are capital in nature, and tenants should almost never pay for capital expenditures.  Your CAM provision is full of the word "REPLACEMENT(s)" and includes a payment for "RESERVES". Your lease attempts to appear reasonable about how the RESERVES collected
in CAM costs are assessed, but the mitigating language that is added to the CAM description of how capital expenditures will be assessed is hijacked by allowing the landlord to use his own personal determination as to how much will be assessed each year as a CAM expense.  The lease could have stated that the landlord will assess the capital improvements over the useful life of the expenditure "in accordance with GAAP (a nationally recognized and accepted standard of the accounting profession) procedures, and not as determined by "the landlord".

In summary, contrary to your statement that "management fees do NOT seem like a part of 'Common Area Maintenance"; it is very common for landlords to include Management Fees in the category of CAM expense.
HOWEVER, you have very explicit text in your CAM provision that addresses which component costs will be included in CAM, and "Management Fee(s)" is conspicuously missing.  You are therefore absolutely correct that this is "FISHY".  Further, if your landlord suggests that the CAM lease  statement "all costs and expenses of personnel to implement the foregoing services" allows them to make Management Fees included as part of the CAM Fees, they are wrong.  Careful review of the "foregoing services" delineated in the text that lists the "foregoing services" reveals that 'Management Services" is NOT included. ( I once had an owner include all the costs of a two week trip to La Costa as a management expense.  He told me that he and his guest were talking about the property expenses while they were on the trip, and so bonafide management charges.)

I am concerned that your landlord will not back down on this problem. However, my guess is that hiring a specialist to win this argument will not be cost effective for you.  Keep in mind however, that if you pay for these Management fees this year, you will pay for them in every following lease year over the term of your lease.

There are many nightmarish landlords that abuse unsuspecting tenants, but there are also many fine and honest owners that would be embarrassed by such abuse.

Good luck with this difficult problem.

-Jim










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

QUESTION: Jim,

Thank you so much for your reply, it does help to clear up what our position on this issue should be.

I noticed that you did not touch on the 20% additional charge above and beyond the actual costs that I mentioned above, is this common?  Would something like this be applied in lieu of management fees?

You are dead right that the owner of the building has his own property management company / in house staff running the property, in fact the owner appears to be a principal in both the company who owns the building and the company that manages the property.  From what I can gather, they are separate LLC's but at the same physical location.

Our proportionate share is over 50% of the building, and as I mentioned the "Management Fee" is the largest single line item in the CAM breakdown.  After the 20% added on top of the "Management Fee", it will cost us over $600 a month, for this fee alone, so it may well be worth our time to fight this charge as that can add up to a significant amount over the years.

VERY interested in any further advice you have for us, esp with regard to the 20% add-on they are charging and, in light of how much we would be paying if we decide not to fight it, whether or not it might be worth it to consult with an L&T specialist.

Thank you!


Answer
CAM Confused:

You have a ugly problem to straighten out.  Yes, the 20% administrative add-on charge is commonly included in leases, however, many tenants ask for Management Fees to be excluded from that part of the CAM calculation.  If it is included in your lease provision, and I see it is, you must pay it. I will tell you what I can without actually being able to know everything I would need to know to handle this problem for you.

I am under the impression that you have done some form of cursory audit of the supporting/vouching documents that verify the landlords
component expenses and determined that all of those individual charges are allowable expenses to assess to tenants per the detailed terms of your lease; i.e., the operating expenses provision.   Have you actually done this?  Normally you would ask the property manager or bookkeeper to give you a copy of the twelve monthly "Chart of Accounts" that back-up the invoice that they sent you.   

The Chart of Accounts is nothing more than a list of the sub-categories of CAM expenses that when totaled up equal the aggregate total expense that is the basis of your CAM bill.   Usually, this Chart of Accounts is part of the landlord or property management firms computerized accounting system, and the bookkeeper or property manager can easily have the computer print out a copy of the monthly Chart of Accounts for each month showing the subtotals for each sub-category of expense.   It will be a list with 12 to 40 sub categories of expenses that will be listed such as: Utilities, Janitorial, HVAC, Parking Lot, Management Fee, Trash removal, repairs, maintenance, etc. etc.  Note: be sure to tell them you will keep the material confidential.

Look at the #12 monthly lists of the CAM expenses.  Look at the category for "Management Fee", or "Property Management" and see what the amount is that is paid each month to the Property Management firm.  The amount may vary each month.  The fee is usually calculated by taking the total amount of revenue(rent, refunds, insurance reimbursement, etc.) collected for each month multiplied by a percentage amount; usually 2,3,4, or 5 percent. The total of those 12 monthly payments should be the total management fee for the year of CAM charge as shown on you CAM bill.  Ask the bookkeeper what percentage is applied to the monthly income to come to the total management fee for each month.  (It is uncommon for the fee to be a flat monthly rate.) Everything in the accounting records should be organized and follow month after month.  If any gaps appear in the bookkeeping records or on the other expense records, you should find out why.  

Ask to see the original copy of the management contract.  The contract will specify what the percentage fee is to be paid each month to the property management firm for their management services.
If the percentage is more than 2 or 3 percent, it may be excessive given the services they provide. Additionally, see what services the property manager provides in return for his fee.  The services should be articulated.  Look and see how it is that signed the management contract for the landlord/owner, and see who signed the contract for the property management firm.

You best chance to challenge the management fees charged in the CAM billings is to determine if there is anything questionable about the management contract that is not "arms' length".  In other words, is there anything odd about the contract?  If the property owner is also the owner of the property management firm, this is a conflict of interest, and a court will look very closely at the contract to see if the contract terms are reasonable.  If it appears that the owner is paying himself a higher than reasonable management fee (above three (3%) percent), you can challenge the amount of the management fee as a conflict of interest and self-dealing by the owner.  Remember, your CAM provision requires that the owner observe "sound accounting and management practices". This conflict of interest is NOT a sound accounting practice.  If the landlord is paying himself more than a fair management fee, challenge the management portion of the CAM charge as a conflict of interest.

If the landlord won't show you the Chart of Accounts for the 12 month period or won't let you review the management contract, they may be hiding something that is unacceptable from you.  

Also, it would be wise to check with other tenants at other shopping centers to see what management fee (what percentage)is assessed by their property manager.  Then compare.

I am more concerned about your lease allowing the landlord to charge you for "replacements" because they can become huge later on in your lease.  

You might also check out the details about the charge for "RESERVES", because that is often a sub category that is the source of many excessive or bogus charges.  Ash the property manager or bookkeeper to explain the details of the RESERVES account and how it is structured.  How much to they keep in reserves?  What did they use the reserve account to pay for last year? If they reach a certain total in the amount of reserve account does the owner stop collecting for Reserves?  Or do they just keep increasing the amount of Reserves cash being saved for a future expenditure?  Do you know?

Keep in mind, you are asking the landlord to tell you how much he wants to to pay him for CAM costs each year.  If you don't check further than the numbers listed on your CAM bill, you will never really know if you are being fairly billed.  Trust, but verify.

Send a follow up again if I can help.
Good hunting.

-Jim