Expert: Jim Avancena, CPM - 6/22/2009

Question
QUESTION: First I do apologize for the long message. Any help or advice is greatly appreciated. Thanks in advance.

Considering leasing a property with a decent base rent, but there's also CAM charges which I have never dealt with before.
1) On average, how much does a tenant pay annually on CAM charges?
2) Below is a paragraph from the lease agreement I am concern about, is it pretty straight forward or does it seem vague on what a tenant is expected to pay for the CAM?
4.2 Operating Expenses. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined, of all Operating Expenses, as hereinafter defined. dUring each calendar year of the term of this Lease, in accordance with the following provisions:
  (a) "Lessee's Share" is defined, for purposes of this Lease. as 20% percent.
       (b) "Operating Expenses" is defined ,for purposes of this Lease, as all costs incurred by Lessor, if any, for;
         (I) The operation, repair and maintenance, in neat, clean. good order and condition, of the following:
         (aa) The Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities and fences and gates;
         (bb) Trash disposal services:......this line is crossed out on the least agreement
         (cc) Tenant directories;
         (dd) Fire detection systems including sprinkler system maintenance and repair;
         (ee) A regular heating and A/C preventative maintenance program;
         (ff) Security Services;
         (gg) Any other service to be provided by Lessor that is elsewhere in the Lease stated to be an "Operating Expense."
      (II) The cost of water, gas and electricity to service the Common Areas.

       (c) The inclusion of the improvements, facilities and services set forth in paragraph 4.2 (b) (I) of the definition of Operating Expenses shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those serVices unless the Industrial Center already has the same, Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them.
       (d). Lessee's Share of Operating Expenses shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's Share of annual Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each twelve-month period of the Lease term, on the same day as the Base Rent is due hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of Operating Expenses as aforesaid, Lessor shall deliver to Lessee within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Operating Expenses incurred during the preceding year. If Lessee's payments under this paragraph 4.2 (d) during said preceding year exceed Lessee's Share as indicated on said statement. Lessee shall be entitled to credit the amount of such overpayment
against Lessee's Share of Operating Expenses next falling due. If Lessee's payments under this paragraph during said preceding year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount Of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement.

ANSWER: Jay-

According to this provision you are obligated to pay for 20% (1/5th) of whatever the total amount of operating expenses are for the entire  property.  Are you going to be leasing 20% of the total rentable square footage of the entire project?   For example, if you are leasing 2,000 sf. of space, is the total amount of square footage in the property that can be leased 10,000 SF?

First you should ask your landlord how much the operating expenses were for the last three years so you will have an idea of how much that is going to require that you pay each year in addition to your rent.   Once you know that information does it seem like an acceptable amount once you add it to the rent payments?   Or does it seem too much?

Many landlords only ask you to pay your share of the INCREASED AMOUNT
of the operating expenses each year.  That is, if the total operating expenses were, just for example, $25,000 for calendar year 2008, and the total expenses went up to $27,500 for calendar year 2009, the landlord would only charge you for 20% of the $2,500 INCREASE in operating costs, or $500 for the year.  If you have to pay 20% of the total expenses for 2009, you would have to pay much more; $5,500.  

You should look at your base rental rate carefully in your negotiations, if it is what you consider to be a high rate, you may need to reconsider if you want to pay the aggressive rental rate your landlord is asking you to pay PLUS the full amount of your 20% or operating costs.  Perhaps you should be paying your share based only on the increased amount.

The best thing to do is find out what other tenants are paying for base rent and operating expenses each year.  This would give you some idea of what a market rental should be for the space.

You know, this is a recession, and most landlords are having a very difficult time finding tenants to pay the rental rates they projected for their space.   Perhaps you should consider reducing the rent you are being asked to pay.

The provision regarding the operating expense charges that you delineated in your question is sloppy work;  The definition of charges to be included could be more specific.  If this is not the first year that this landlord has operated this project, he can provide you with a very specific list of what the operating cost charges will be based on; he has them from last year and probably many years before that.

You can ask your landlord to show you copies of exactly what the operating costs were in list form for the last few years and how much each cost was.   This will show you what the component costs will be and you will know what the definition of operating costs actually consists of.   If you landlord refuses to show this information to you, I would be concerned why the landlord does not wish to be  straightforward with the information.

You might also ask that the lease provide that the statement of operating costs be reviewed and verified by an accountant each year to be certain that the total each year has been calculated correctly.

Good luck,

-Jim

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

QUESTION: Jim, thank so much for your advice.

The unit I was looking at is 5900sf, and the industrial park has a total of 5 units, so I assume each unit is approximately 5900sf and that's why the lease says 20%, and the base rate is $2800, which is about 0.47 per sf. For the paragraph of Operating Expenses in the lease agreement, I also get the impression it is very unclear of what they will charge tenants in regard to Operating Expenses.

Base on what you have replied, I am just going to stay away from this type of lease and stick with my current type which is gross lease with monthly set rent.

Thanks a million.

Answer
Jay-

Two comments.

First, if the landlord will show you his actual expenses - those that were the basis of his billings - for the last two or three years, and those reflect that he has good management skills and a solid ability to control his costs, you shouldn't be overly concerned provided you can get lease language that specifically defines the list of operating expenses that he reveals to you.  Be sure that there are not any expressions like: "and related costs" or "etc." that allows them to then throw in the kitchen sink in other expenses.

Second, you can insulate yourself from extreme operating cost increases annually by asking your landlord for a limit or "cap" on how much the operating costs can increase each year.  For example, you may agree that if the operating costs are, for example, a total of $.83 per square foot for calendar year 2009, a increase cap of  8% in any one year would mean the cost would be no more than $.90 cents the following year.  Some landlords avoid a cap because they can get a major increase in their real estate taxes or utility rates suddenly and they may not be able to recover those increased costs from you if you have a cap.  Since the increase in tax or utility rates had no relationship to poor management of their expenses, they feel that they are then being penalized when the increase was not of their making.  You may be able to discuss this with the landlord and agree to exclude one or two costs of the component expenses, and limit everything else.

Finally, beware of hidden expenses in gross leases also.  In each form of lease there are ways a landlord can increase its revenues that you may not be familiar with.  Be vigilant and do as you have already done with this lease; beware of every word and its impact in a lease.  Better yet, you should consider either hiring a sharp real estate broker to assist you in the future or an attorney that is familiar with landlord/tenant law.

Best of luck.

-Jim