Expert: Jim Avancena, CPM - 3/19/2008

Question
I am an asset manager and we own several buildings (Class A) which we provide onsite management which provides excellent service to the tenants.  I am trying to verify what is "reasonable" to charge tennants in CAM so that we are not being unfair to either the tennant or ourself.  We have very good relationships with them all.

Note, the CAM section in our lease is very beneficial to us and many of the items we do not pass through to the tenant.

Essentially, I am trying to figure out what would be a narmal charge.  I know that many properties will charge a "management fee" (% of gross rents) and then will pass through the direct people that manage the property, such as "office payroll".  In addition things such as postage, phones, internet, and other office expenses are passed through.

In theory, should a management fee encompass items such as the ones above or should the other items be included outside of the management fee and passed through as they are used.

Just want to make sure that we have a fair system set up.

Thanks

Answer
Allan:

You are the first asset manager I have found that is concerned with what is reasonable to assess his tenants.  Bravo!  It is also a thinking mans' attitude toward tenant retention.

Your questions regarding the management fee suggest much thought has gone into your considerations.  I have been involved with, or very close to, property management and the allocation of operating expenses for a very long time.  Thirty years ago landlords charged more modest fees for their services, and considered that salaries and related cost of the service staff on-site, building managers and property managers were all costs that were subsumed in the management fee.  

Gradually, over the years, more aggressive property owners would include more and more of the costs to own and operate commercial property.  Typically, as the more conservative owners discovered the additional costs that other, more "creative" owners were allocating to their tenants, they would do the same.   

I am amazed that this practice of inclusion has continued to the point it has now in our industry.  The more recent component addition in the process of bundling more and more of what I would call "ownership" costs into reimbursable tenant charges takes a step too far.  The inclusion of having tenants reimburse their owner for capital expenditures has become excessive.   Twelve to fifteen years ago owners began to request reimbursement for capital costs directly related to energy management equipment of various types had actually reduced the utility consumption of the property.   That crack in the lease language regarding the inclusion of that narrowly defined capital expenditure, has now been opened to the size of the Khyber Pass and it is common for landlords' to allocate the cost of virtually any capital expenditure to tenants.  Further, the capital cost is calculated based on the "useful life" of each capital item "as determined by the landlord in its sole judgement".  You may imagine how brief the useful life of many capital expenditures has become.

Nothing could be included now as a reimbursable tenant cost that would surprise me.  The cost of luxury automobiles and vacations to Caribbean resorts for annual management meetings are making their way into CAM billings.

All of the above tells me that owners may assess whatever they can get away with now for CAM or operating costs.  Until tenants are more savvy about the specifics of the text found in the owners "standard form" CAM or operating cost reimbursement lease provisions, this runaway train of CAM and Operating Expense costs will continue to expand.  Tenants must understand and actively resist the risk involved in the additional rent provisions in their lease or accept the cost of ignoring the greed that can develop when opportunity meets money that is unprotected.    

You probably realize that although I do not approve of the rationale behind including the many administrative costs like postage, phones, etc. as reimbursable expense, it is commonly included in the definition in one way or another as a charge to allocate as CAM or Operating Cost.

My short answer to your questions then is that any cost that is specifically includable based on the language in a tenant's CAM or operating expense reimbursement provision is acceptable to charge to your tenants.   If, however, the wording of the CAM provision is vague and ambiguous - and many are - most owners include costs to the same degree that they believe they will prevail versus a tenants' legal challenge to the assessment.

-Jim