Expert: Jim Avancena, CPM - 2/18/2011

Question
We recently asked our landlord to provide cam charge expense details, our lease allows this. Our reason for the request is that he owns a business that shares the parking lot of our strip mall and uses his employees (from the business sharing the parking lot) to do most of the maint. Such as snow removal and parking lot cleanup ect. ( a very poor job of snow removal) We were recently informed by one of the employees doing the maint that he is not paid in addition to his reg pay to do these items such as scoop snow and clean the parking lot yet we pay snow removal charges and large cam fees for such items. What we are questioning is where the money is going if those employees are not paid to do these things and if we can be charged for them in our cam fees? Isn't there a conflict of interest when the building owner does not hire an outside company to do this stuff? Can a building owner do his own maintenance and charge us a "guestimated rate" for certain cam charges? Our business is in iowa. Any information would be helpful.

Answer
Laura:

Certainly it is a Conflict of Interest.  But is it ultimately actionable?

You may be surprised to learn that your situation, and specifically the questionable management procedures you detailed, are not uncommon.  There are many issues involved with what you describe, however, in order to confirm that your CAM charges are being under or overcharged to you and perhaps other strip mall tenants, you, or someone skilled in this specific process, must do a very accurate audit of the documentation that your landlord says will support the accuracy of its CAM billings.  

First, you must trust that if you want to be successful challenging your landlord's CAM billing, it cannot be done halfway.  It is usually a VERY contentious, time consuming and costly process -if your activities are going to have any integrity.  Simply making lots of noise about how the landlord's operations APPEAR questionable will allow you to vent your frustrations, but it usually won't get you a point where you can prove your landlord is using unacceptable, and in some cases criminal, business practices, or that your CAM charges are incorrect.   You can't go part of the way, you must go all the way, or don't bother.  

I can also tell you that in an overwhelming number of the cases that I have been involved with where we performed a formal audit of the landlord's accounting records and supportive management records, the landlord's billings were significantly or substantially incorrect.   In many cases, fraud was involved.

Your question generally involves determining if your landlord's property management contracting and purchasing meet the industry standard of "Arm's Length Transactions", and assuring that there is no conflict of interest involved.     

GAAP accounting standards stipulate that the landlord pay a reasonable market price for the service.  If your landlord is paying his private business a reasonable market fee for the snow clearing work from the shopping center checking account, and he is paying his own employees for the true amount of time they work per his employment agreement with each of them, then your cost concerns about whether your CAM charges may be inflated because of what is paid for the snow clearing could be misplaced - although his business practice inappropriate.  

However, a worst case scenario suggested by your comments could be that the landlord is NOT paying his workers for the work he asks them to do clearing the snow, writing a check to himself or his private business from the shopping center checking account for an amount that is for more than a fair price, then includes the over-payment he made to himself in that years shopping center CAM cost.   In such case, your landlord is abusing his responsibility for preparing and collecting reasonable CAM charges in order to profit from his management duties.

I have discovered that many landlords will sign a contract with either another company the landlord owns or a company operated by a friend or relative to remove the snow from the shopping center parking lot , however, the contract stipulates that the shopping center pay them much more than would be paid if the landlord had put the contract out for bid, or paid a industry standardized rate for the snow clearing.  Again in this way they are using their position as the landlord to make fraudulent profits by over-charging for work that will be repaid by the tenants as CAM charges.

Technically, the contracting process above is NOT an "Arm's Length Transaction" which is the accepted standard for fair and reasonable accounting practices.   An Arm's Length Transaction is a transaction between two un-related or non-affiliated parties (i.e., not itself, a friend or relative) that is conducted in a way that results in fairly priced market rate transactions.

Your landlord will find a great deal of legal precedent is stacked against it if they continue to block your access to it's CAM expense records.  Many attorneys have challenged landlord's over-charging their tenant's CAM charges as a "Breach of Fiduciary Duty" and in the last decade courts have argued that a landlord has a duty of good faith implied in CAM disputes; i.e., the implication that a landlord disclose the basis on which the tenants share of the CAM costs were computed.  Most courts have established that a fiduciary relationship exists between a tenant and landlord, and that a tenant must to rely in good faith on the landlord's assessment of charges for the maintenance of common areas.   Since the tenant has no means of determining whether the annual CAM bill correctly reflects the landlord's costs to maintain the common areas, many courts have concluded that the tenant is entitled to "an accounting", that is, an itemized list as to category and amount of costs incurred to maintain the common areas.  Look-up online: "PV Properties vs. Rock Village", and dozens of listings will come up that describe in detail a multitude of the legal issues involved in the CAM overcharge matter that concerns you.

Finally, a building owner can do his own maintenance and charge a FAIR MARKET COST for CAM charges.  No "Guestimates".  Note however, that if you challenge the amount your landlord has charged his tenant for a specific CAM cost, you must be certain to have a rock solid, easy to prove, FAIR MARKET PRICE for what that CAM cost should be in your IOWA market area.

Before you make the effort to go after your landlord for CAM cost over-charges, be sure that the amount of money being disputed makes it worth the effort.  In nearly every case - unless you find that other retail tenants in your shopping center are also willing to join your efforts - the efforts you have to make to proving your overcharges is going to far exceed the amount you challenge.

Good luck,

Jim

P.S. I once had a CAM case similar to the specific instance you cite in your question.  In that case we discovered that the landlord; who also owned a construction company, was charging the property for the hourly on-site property employee expenses for the maintenance work they did around the property.   We requested a review of the employees time cards, copies of their W-4's and other employee records to verify their expense.   Like your situation, this landlord rejected our request for the related details but argued against our general right to review ANY records regarding the CAM expenses.   Later we discovered that the landlord did not have any time cards or W-4's for the employees pay that he had charged the property for maintenance, he had charged the employees time based on their time cards for his construction company!  The landlord had been charging the hourly fees of the employees as both construction charges for the other buildings his construction company was building AND again as hourly fees for working as our property maintenance staff.   Note that the landlord was forced to dispute our right to the CAM expense records because he knew he did not have any records for property maintenance staff.