Expert: Jim Avancena, CPM - 12/2/2008

Question
Cam has not been charged to tenants for several years altho their lease specifies it is to be paid. Can we go back and  charge them, if so, how far back. Also, do we have to deduct the vacant office space from total sq. of the bldg when we calculate their percentage of expenses. thanks

Answer
Larry-

Back charging for past CAM charges that were overlooked is a legal matter that is addressed differently by the courts depending upon your local jurisdiction.   Some courts allow it, some do not.  You should contact your local Bar Association for advice.  They can also advise you on how many years back you can go.

The answer to your 2nd question regarding determining a tenants percentage share of expenses is a bit more complicated than you might expect.  It depends upon if the tenant leases recognize the impact of variable and invariable expenses and/or contain gross-up factoring of expense.

I cannot tell from the facts provided if your building contains only office space, or if it combines ground floor retail space and upper level office space.  Normally CAM cost reimbursement applies to ground level retail and office space, and Operating Expense reimbursement applies to upper level office space.

The answer to your percentage share question can be extensive.  Let me give you the most basic answer I can understanding that you are attempting to discover the methodology for allocating expense reimbursements.

Step one, read the specific stipulations in each tenants CAM or operating expense provisions to discover the methodology required for use in calculating the CAM or Operating Expense charges for that specific tenant.  The vacancy factor of either the office or retail portion of a commercial property is not deducted when calculating a tenant's pro-rata share of expense, however the allocation of a certain portion of an aggregate CAM or Operating Expense can have the same effect as a variation of the tenant's pro-rata share.  More on this later.  

Leases are often unique in certain aspects of their expense calculations.  One tenant may be required to pay its share of expenses based on the aggregate expenses and another tenant's lease may require that the tenant only pay its share of the expenses to the extent they exceed $4.50 per square foot.  Determine the method that applies to each tenant lease.

Additionally,you have to determine if the retail or office tenant benefits from a specific component expense or not.  If the tenant does benefit, the tenant should have to reimburse for a portion of the benefit, if it does not receive a benefit from the expense it should not.  The lease will usually stipulate the expenses that are to be reimbursed by the tenant.   
For example, if your building is a multi-floor office building with retail shops and offices on the ground level, none of the expenses related to the building elevators should be included when you total up the many component expenses allocated for reimbursement from the ground level retail or office tenants.  Why?  The ground floor tenants don't use the elevators.  The total expense of the elevators should be assessed to the upper floor tenants only.

What you end up with is: 1.) an aggregate total of Operating Expenses allocable to office tenants, 2.) an aggregate total of CAM and Operating Expenses for the ground floor office and retail tenants, and 3.) an aggregate total of expenses that apply to both.   Note that each total can include some of the expense items from expenses allocated to other categories.

For example, the cost of a security guard wandering around the property for 8 hours in the afternoon and evening would benefit both the retail and office tenants, so the guard expense should be equitably allocated to both expense categories.  We know from the earlier example, elevator costs should be allocated only to the upper floor office tenants.   Parking lot snow removal costs would also apply to both groups. The aggregate cost for heating and air conditioning expenses would be charged only to the upper floor office tenants because the ground floor retail and office lease tenants usually are required to hire and pay directly for their own heating and air conditioning services.  

Each individual expense must be analyzed and allocated to a upper level or ground floor level aggregate expense total or both - unless the individual lease states otherwise.

Once you have made the aggregate determinations of expenses for the various categories, you then assess each tenant their charges for CAM or Operating Cost Reimbursement based on their pro-rata (proportional)share of their group category of square footage.  As an example a 10,000 square foot office tenant would have a 10% pro-rata share of the total upper floor office space of 100,000 square feet.

OK so far?

Now we get to the other significant consideration in allocating CAM or Operating Costs that involves variable and invariable expense that CAN or CANNOT fluctuate based on vacancy.

By example, if there are 100,000 square feet of office space on the 2nd through 11th (top) floors, that means that there are 10,000 square feet of office space on each upper level floor.  Correct?

If the daily office cleaning charges per year for the upper floors is $90,000 dollars, and one floor was vacant for the entire year, how much of the $ 90,000 expense is allocated to the upper floor office tenants aggregate expense total?  All $90,000, and none is allocated to the ground floor retail or office tenants.  Note however, if the lease contained a Gross-up provision, the landlord would be allowed to artificially increase the $90,000 of cleaning cost to $100,000 to reflect the cleaning cost for the upper floors as if the one floor had not been vacant for the previous year.  

Consequently, although the tenants pro-rata share of the upper floor operating costs did not change due to the vacancy factor, the dollar amount of cleaning cost allocated to the tenant to reimburse to the landlord was adjusted to reflect the vacant office space.   Further, if the tenant's lease contains a provision allowing the landlord to artificially gross-up his operating costs to reflect the impact of vacancy on the actual expenses incurred, it has a similar effect to adjusting CAM or Operating Expense reimbursement according to vacancy.

It is difficult to summarize this matter except to say that you must carefully review each tenants lease language to determine if you have to adjust how you calculate each tenant's share of expenses.

Good luck.

-Jim