Expert: Stephen A. Cross, CCIM - 3/7/2010

Question
QUESTION: We have a retail space in Northern California with a clothing store. The lease identifies CAM charges (indirectly as NNN) and allows for shared repairs and the like on the building and parking area based on percentage sq. footage.
The parking lot is owned by our landlord, who owns two of the 3 buildings which surround the parking lot. There is a trash receptacle in the parking lot, which is shared by all 3 buildings, such that the 3rd building's tenants pay for trash collection directly to our landlord through a separate agreement/contract.
I have 3 questions:

1. 4 of the tenants across the 3 buildings are restaurants and produce the vast majority of the waste. 2 of the restaurants opened recently and are very large and have increased the waste cost by 2x (the bins must be picked up twice as often per a letter from the waste company). My lease does not indicate how waste is to be charged. What is the default rule when there are mix of normal retail with almost no waste and restaurants with large quantities? Is there any case law precedent on it (Appellate court or CA Supreme Court) or at least lower court rulings in CA?

2. When one of the restaurants was built in 2008, the city made the property owner (my landlord) build a waste bin enclosure and drainage system at a cost of $10,000. My question is who is responsible for these costs? I am not sure if it is parking lot maintenance (which is covered in the lease) or not. I am not sure if that cost should be covered by all of the users of the waste bins (the 3rd building's tenants pay for waste pickup). Again, is there precedence on this?

3. The property manager suddenly dumped a "reconciliation" from 2008 on me for a few thousand dollars along with 2009's reconciliation; the main adder cost is the waste enclosure, which they clearly knew about in 2008. I was under the impression that in CA, you have to submit these in Jan in the following year. Drawing from cases such as Tin Tin, it would appear that CAM is treated like rent, which can be back adjusted for no more than 12 months (so Jan, would apply to the preceding Jan's CAM charges). Do you know of any explicit case law on this in California?

Thanks in Advance. Regards, Paul

ANSWER: Paul:

In my experience, the cost of trash removal is generally a NNN expense, which is typically divided among the tenants on a pro rata basis. However, the assumption is that the tenants will use the trash service on a relatively equal basis, which does not appear to be your case.

Based on the facts and circumstances provided, I suggest writing your landlord to explain your position and reasonably request that those that have requested additional waste pickup be charged for the extra cost. Note that the operative word here is 'reasonably'.       

This reasoning should also apply to water usage, if this expense is also included as part of the NNN expenses.

Regarding the waste bin enclosure and drainage system: In my experience, such non-recurring expenses should not be considered normal maintenance costs, and should be correctly treated as capital expenses. It would be unusual for a lease to require that Tenants pay for these types of expenses as part of the NNN charges.  

If you utilized a real estate broker and/or an attorney in connection with your lease, they should be asked to opine on these questions, as well as California case law.   

Very truly yours,

Steve   



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

QUESTION: OK, on the trash expenditures. I can ask, but it helps to know if there is precedent on my side. It is strange that this has not come up since unequal usage would be a common issue I would think.
As to water, the lease specifically calls out that if there is not a unit meter, the usage percentage should be estimated as if there were a meter (that is, fair share based on actual usage). In this case, there is a unit meter.
On the enclosure/drain, you say it should be capital expenditure, but doesn't NNN often cover such costs (e.g. refacing) under "maintenance".
The attorney that reviewed the lease does not have any idea. I guess we will need to hire someone to try to find out the law.
Thanks, Paul

Answer
Paul:

Resurfacing the parking lot is a maintenance item, and would be included as part of the NNN expenses. This is different than constructing a new parking lot, which would be a capital expense.

Likewise, constructing a waste bin enclosure to accommodate a new tenant is a capital expense.

Very truly yours,

Steve