Expert: Mike Fortunato - 7/13/2009

Question
QUESTION: Hi Mike,

Can you share some of your expertise on some common practices/methodology on calculating the common area maintenance charge rate (per square meter)?

Say for example, I am a landlord of a large lot area and I lease out property to commercial tenants and also I am also a business owner of a train service for tourists.  In general, I have learned that CAM rate is determined by dividing total operating and maintenance (O&M)costs by the gross leasable area. The calculation becomes complicated by the following factors and I am wondering what you suggest would be a fair method:

1)The O&M costs include items such as road repairs, snow removal, and landscaping etc.  The access roadway is clearly used much more by the passengers bound for train services; however, the tenant's employees and customers use the road way as well.  Is it common practice to apportion the costs based on traffic volume (or usage) as opposed to the more tradition way of using site-area apportionment method?

2) Would you include undeveloped land as part of gross leasable area for the rate calculation if you plan to develop the area for commercial leasing within 5-10 years as there are still roadways that lead to those areas that maybe considered common area?

Do you have any resources that fully illustrate the calculation of CAM?

Thanks for your advice!

Doreen


ANSWER: 1.  It would be nearly impossible for you to determine (and monitor) usage on the roadway per tenant, so it would probably be impractical to use some sort of formula to divide the operating costs other than the usual square footage method.

2.  I would only include the undeveloped land if it were currently (or near term) used as part of the project. In your situation, I would include a lease provision whereby the landlord has the right to increase the size of the common areas as part of developing parcel ___, and if so, the percentages would change accordingly. It shouldn't change much though, since that additional parcel would presumably also have occupants who would be paying their share.

No sources I know of to point you towards, although there's bound to be something on the internet.

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

QUESTION: Hi Mike,

Thanks for your quick reply. I agree it is very difficult to measure usage.  Therefore, even if the railroad company may generate more than 50% of the traffic, then it is still defensible by "common practice" to just divide according to area?

I have couple of other follow up questions for clarification.  

To derive the CAM fee per square meter, then I would use the formula:

Total O&M costs / Gross Leasable Area.

In my case, would the denominator include all of these areas?  

1. Occupied commercial land area
2. Vacant commercial land area
3. Nearly developed commercial land area
4. The landlord's railway company area (only building area; not including the actual rail road track areas)
5. Lot area for the maintenance garages

Can you please clarify what types of areas should fall under the GLA for calculation? Should it include every land area of the participants that use the road area? If so, what if some areas are adjacent private or municipal areas?

Please correct me if I'm wrong in the above assumptions.

Thanks Mike!

Answer
Yes, that is a defensible position. Of course, any tenant would need to lease in that project knowing up front how all of that is calculated, and would need to be comfortable with those terms.

Your formula is basically correct, but unfortunately in this business, you can't apply a template to every situation without some adjustment in the interest of fairness. The goal should to have all tenants/occupants pay their fair prorata share of the operating expenses, for items that benefit everyone. The idea is to separate out any components which may tend to grossly favor one occupant over another, to the extent that is feasible to do so.

Without being familiar enough with your particular situation, I wouldn't know where to begin to try and recommend exceptions and variances. And I'm not certain whether inclusion of the undeveloped areas makes sense at this point, as it could hurt the property owner's ability to get reimbursed for these costs (since their prorata share could be much larger by virtue by the size of the vacant land).

Wish I could refine my answer more, but this requires a more in-depth analysis than a simple email thread would permit. As long as you keep fairness in mind and do everything reasonably possible from an impartial standpoint, you should be ok.