Expert: Jim Avancena, CPM - 6/22/2010

Question
Dear Sir,
I signed a commercial lease in 2005 with $2.31/sq.ft for CAM (property tax, insurance and maintenance. An investment holding company bought the shopping center and the property tax and insurance went up triple and double, so as management fee. Property tax increased triple because of exchange hand of the property back 2006. I didn't signed the lease with high CAM fees. I been paying the CAM fees addition to the base rent every month for the last 25 years. Now new landlord billed me extra amount of fees. Do I have to pay? Do I have any chance to win this dispute in court?

Answer
Johnny:

I do not know without further investigation why the CAM expense categories you indicate increased so dramatically; however, it is common for real estate property taxes to increase after a sale because the new owner paid significantly more for the property than the amount that was recorded at the time of the sale by the local taxing authority as the value of the property.   

The higher price paid acts as a catalyst to the local government appraiser to re-evaluate the value of the property and create a new assessed value.  The next tax bill following the sale will likely incorporate the existing tax rate applied to the new higher assessed value and the amount of the property tax will increase dramatically.   Hence, you are likely paying your share of the much higher real estate tax bill because the new landlord - in accordance with your lease - is passing along your share of the property taxes.

The insurance probably increased because the insurance company had to recognize the new higher value of the property in its' premium; i.e., when the value of the property increases, the premium also commonly increases.  

Note again, this is the probable cause of these increased fees you are paying, although it is possible there is some other reason.  You can go to the office of the local taxing authority and ask them to verify the reason that the property tax assessment increased and they will be able to show you the governmental records in this matter.  Unfortunately, some jurisdictions do not share such information with the public.

In some cases it is possible to successfully challenge the increased real estate tax fee you pay each month to the landlord. Although it is best if a lease provision had been added in your original lease that stipulated that you would be excluded from a real estate tax increase that occurred on this basis, you may find that your landlord will exclude this increase (and return the increased portion of past monthly tax payments!) if it expects that the local landlord / tenant law would likely support your challenge to the increase based on the price that it paid for the property.  However, it is likely you will find that your landlord will force you to go to court to achieve this reduction in your tax fee.

This is clearly a legal matter.  You should consult a talented local landlord / tenant lawyer in your area and get their opinion on this before making the challenge to the landlord over this increase.  An attorney that is actively involved in landlord / tenant court matters in your area will know if you have a good chance of making a successful challenge.  Your legal argument will probably be that the purchase by the current landlord acted to artificially increase the value of the property because it paid an increased price for the property.  You did NOT benefit from the action of the landlord, the new landlord is benefiting from purchasing the property, and you should not have to pay the increased fees to subsidize an action taken by the landlord directly in its' own self interest.  

Additionally, often a tax increase can be caused by significant capital improvements being made to the entire property at great cost by the new landlord, such as: massive new and expanded landscaping is added all around the property, new and better lighting for the parking lots, a new architectural facade is put of the exposed face of all the stores in the shopping center to make the shopping center appear more appealing to customers, or even massive improvements being made to one of the "anchor" stores in a shopping center.   In the case of some of the improvements listed, you and your attorney would have to carefully determine if a landlord / tenant court judge might determine that some of these improvements might actually benefit you by increasing the amount of customers coming to shop at your shopping center.

You will need your landlord / tenant specialist attorney to advise you further in all of these matters.  Depending upon the law in your area, the increase in the CAM insurance charges would also appear to be an indirect result of the increased property appraisal following the sale of the property and might be another matter that you attorney could advise you further.

Any increase in the landlord's management fee would be difficult to attribute to the higher sale price of the property.  There may be reasonable justification for the management fee increase such as the prior owner was charging less than a reasonable "MARKET" fee based on the quality of management services it was providing (unlikely), and the local "INDUSTRY PRACTICE" in your market area. area.   Beware however, it is also COMMON for a new property owner to increase the amount of the management fee at a new property it has purchased if the new owner provides the management services or controls the new contract management company.  This would require that you determine if the award of the management contract and concomitant fee could be considered less than an "arms length transaction" if an exorbitant management fee suggests further review.

Most of the issues discussed above should be referred to your legal counsel as I an not an attorney and not qualified to give any legal opinions.  My comments should give you some good material to get started with once you retain legal counsel.  If you win this dispute in court, ask you attorney if he can recover his reasonable legal fees from the landlord.

Good luck.

-Jim