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Commercial Real Estate Investment/cumulative vs non-cumlative increase caps

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Expert: - 12/5/2009


Question
can you tell me by this lease language if the CAP is cumulative or not?

Operating Expense Increase...Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined, of  the amount by which all Operating Expenses, as hereinafter defined for each Comparison Year exceeds the amount of all Operating Expense for the Base Year, such excess being hereinafter referred to as the "Operating Expense increase", ... The Tenant will pay their pro rata share of Direct Operating Expense cost in excess of Base Year 2002.  The Base Year shall be grossed up to reflect a 95% level of occupancy and a 100% full tax assessment.  Calendar Year 2003 shall be established as the first Comparison Year.  Tenant's pro rata share of "controllable Operating Expense" increases shall not exceed 8% per year.  

I need to know if this 8% is cumulative or non-cumulative.

This will help settle a conflict of terminology and language at my office.  

Answer
Lynn:

This parties intent regarding the application of the 8% limitation in your lease provision is ambiguous.  The 8% limit applicable to controllable operating expense is clearly cumulative provided the controllable operating expenses increase every comparison year by 8% or more.

The question is - for example - what is the correct amount to assess the tenant for controllable operating expense in the 2nd comparison year; i.e., Calendar Year 2004.  What happens if the controllable operating expenses in comparison Calendar Year 2003 increased by only 5%, and the controllable operating expenses applicable to Calendar Year 2004 go up by 12%?

Is the landlord limited in Calendar Year 2004 to charging the tenant an increase of 5% (Cal. 2003')plus 8% (Cal. 2004') for the increase in controllable operating expense, or 8% plus 8%?

It seems obvious that the intent of the 8% limitation was to motivate the landlord to properly control those operating expenses that can effectively be controlled.  Allowing a cumulative 8% limitation undermines operating expense control efforts by insuring the maximum 8% will be assessed the tenant regardless of the amount of the landlord's expense reduction effort.  However, my guess is that the landlord might have a reasonable argument that supports the cumulative 8%.   

Sorry, I cannot settle your conflict.  There is ambiguity inherent to your lease provision and the difference of opinion may require that the local court resolve the ambiguity.   A few more words could have been added to this language originally that would have clarified the cumulative issue.

-Jim  

Commercial Real Estate Investment

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Jim Avancena, CPM

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Best qualified to answer questions that involve commercial leases, that is, basic issues as well as the often unexpected effects of the complexities and inter-relationships of the provisions a lease may contain, explain how seemingly innocuous text in your lease can have a major impact on a Tenant or Landlord and their business operations, and the common practices utilized in the industry. I can untangle most matters that may come up from the time a tenant begins searching for a office or store space and the lease acquisition process, concerns related to remodeling/improving the leased premises, moving-in, subletting or assigning the leased space, and a long list of problems that may come up during the lease term and even after a tenant moves out. I have practical experience with most property management issues and resolving landlord and tenant disputes - especially those involving what may appear to be overcharges assessed for additional lease charges like CAM costs, operating expense reimbursement, real estate taxes, utilities, construction improvements etc. Note that I am not an attorney and cannot provide legal advice.

Experience

Thirty years active experience in the commercial real estate industry as a licensed real estate broker in the Washington DC Metro area (DC, Northern Virginia & Maryland). I have been admitted (approved) by the Maryland and DC courts to testify as an expert witness on the subjects of Commercial Leasing and Property Management in the area of standard industry practices. I have had a business for the last 14 years advising virtually every form of business entity from large national corporations to the smallest ma & pa new businesses regarding a wide range of commercial real estate matters in addition to property management and commercial leasing.

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Currently my three children keep me so busy that it is difficult to participate in organizations with continuing and specific time requirements.

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I publish a local commercial real estate newsletter titled: "Tenants First". My firm was the subject of a high profile Washington Post business section cover page (2.25 full pages) feature story on January 13, 1993; titled "Overcharging Overhead".

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BA in Political Science from Memphis University, and five years of study in the real estate development summer program at MIT. I was certified as a commercial property manager (CPM-IREM), and currently hold a brokers license in Maryland and the District of Columbia.

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The same plaques and honors that most others in my industry have earned. I have none that I consider especially meaningful.

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Past clients include: The World Bank, George Washington University, National Association of Criminal Defense Attorneys, US Department of Commerce, The American Benefits Council, K-Mart Development, many law firms, a national union, other major organizations, and many, many small business firms and retail operators that I am most honored to serve. I estimate more than 1,500 firms/organizations.

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