Expert: Jim Avancena, CPM - 3/4/2009

Question
Jim,

I have a few questions on CAM reconciliation and management fees.  I am looking into renew my lease and would like some good CAM lease language.

On Jan 1, 2008 the building was purchased by 3 individuals.  These 3 people own 3 different companies and have move into 3 units that take up 50% of the space.  I have 30% (about 14,000ft) of the space and a 5th tenant has 20%.  The owners have been good guys and reasonable over the past year but this is the first building they own and I think they are putting thing in the CAM that should be there.  I would like an outside opinion as well as ideas about the future since I am looking at continuing my lease for another 1-3 year lease.         

Concerning the reconciliation of 2008:  The following items were put into the CAM what are your thoughts:  ( I can send the exact language of the lease if we want to get legal but what do you think is reasonable)

Legal Fee $6000.00 – Between new owners and the tenant (20% of space) for new rental agreement and disputes.   I believe this should be an owner expense.

New signage for entire place $4000.00 – should this be amortized over GAAP  

Management Fee $21000.00 paid to one of the owners for management (FYI rent is about $8.50 per sq ft with total building sq ft of 44,000)  so total rent for the building should be $374,000  if you use 3% management fee that should be $11200.  Is that correct?  Space is mixed office and warehouse.

Accounting fees $3492.00  paid to accounting firm for I believe Management and owner accounting.  Should this be part of CAM?  

There are a few smaller items.  The total amount I am questioning is $44000.00  My share at 30% is about $13,000.00 for 2008.  I want to settle these items immediately so that we are clear for items in CAM in 2009.  I also have some leverage since I looking at renewing my lease which ends in Dec 2009 for another 1-3 years and there is considerable space in the area available.

Last question.  Do you have a boiler plate CAM section for a lease.  What should it say and shouldn’t it.  I would like to get the correct language in the next lease.  

Thank you in advanced

Mark  

Answer
Mark-

Landlords want tenants to accept a lease that includes vague and inclusive language to describe the costs that their tenants should reimburse them for each year so that a landlord can include just about any expense in the aggregate total that the tenants are asked to reimburse the landlord.

There is no reason you should have to reimburse the landlord for any portion of the costs of a legal dispute between it and another tenant.  No way.   Unless, of course, you signed a lease that stipulates a general category of "legal fees" as one of the reimbursable costs.  

If you benefit from the new $4,000 signage you should pay your share of the cost in accordance with GAAP.  If the new sign lists other tenants but excludes your name on the marquee, I would dispute you having to pay a share of the signage cost.  GAAP is the appropriate manner for handling the cost of the signage, but very few property owners use that method anymore, and it is rarely stipulated in the lease.

The management fee seems high, however, if your lease stipulates you will pay your share of the management fee; and does not stipulate anymore detail than "management fee", you are likely stuck having to pay the fee included.  Three percent (3%) is not generally a excessive fee except that the fee paid should be related to the specific management services that the property management firm provides to the owner for its' three percent (3%)fee.   What services does your management company provide?

Often the accounting fee is for the accountant preparing the landlords tax return for the entity that owns the property.  If that is the case, the fee is a cost of ownership and not a cost of operating the property.  The bookkeeping necessary to manage the property is usually one of the services included in the management fee.

In addition to actually listing the precise expense items that will be includable  and EXCLUDED as a reimbursable CAM cost, (restripping the parking lot, snow removal, etc. etc., and specifically excluding accounting fees included for the preparation of the ownership tax returns, legal fees, any cost associated with the ownership or operation of automobiles or trucks, travel expenses, etc.) you should include the right for you to examine the individual supporting documents that vouch each component cost that add up to to the aggregate total.  If possible, include a cap on the maximum amount of increase in CAM costs in any one year.  

The most damaging expense to exclude from CAM costs is any cost that is capital in nature.  Many landlords have started including capital expenses in the definition of CAM or Operating Expenses that are reimbursable.  This can be a huge expense for allocation to the tenants of any property.  

Best of luck.

-Jim