Expert: Stephen A. Cross, CCIM - 1/22/2012

Question
We purchased the first floor of a two story building.    We signed a CC&R contract with owner of the building.   He owns the second floor.   We received a bill for CAM with no explanation of the fees.    I called the owner and asked to sit down and discuss the fees.   I wanted to understand how we were being billed.   I received via e-mail a document that detailed at a high level the breakdown of costs.   

His e-mail back to me:

I’m sorry I wasn’t a little more clear in what the bill represents when I sent it.   I have been and will continue to manage the building and I should have added an explanation of how the CAM (Common Area Maintenance works.

I have attached a summary sheet that shows the Rentable and Usable sizes of the various suites in the building and their associated percentage of the building.  You might note that the main floor that you purchased represents 47.72 % of the building.  The upper floor is slightly bigger (52.28%) because of the window projections.

The CAM is determined by estimating the costs associated with the building and those costs are allocated on a monthly basis to each of the suites/owners.  We have estimated the costs to be $4.00 per year per square foot of Rentable space.  The building is quite efficient and this estimation is between $.50 and $1.00 less than similar buildings in the area.

The attachment shows the budget for each of the items required for the maintenance and upkeep of the building and how those costs are allocated to the various suites.  You will see that we have adjusted the amount you will pay because since you own your suite, you will receive a tax bill directly from Salt Lake County.

The chart shows that you will be assessed $1,600.00 per month for your portion of the building for the current year.  The CAM will be adjusted annually based on the actual costs at an owners meeting sometime after the first of the year.

Since you closed on the purchase of the building on the 11th of June, I prorated the June CAM to 2/3 of the monthly fee, or $1,067.00 as well as billing $1,600.00 for July.

I called him back after reviewing the bill.   CAM Rate was 4.   Total CAM rates were $4,400.   Our portion was 1,600.    Management fees were $800 - 18% of the total bill.    I expressed my concern at the management fees and said that we'd like to discuss managing the building as we were (at the time# the only tenant and running a medical practice that required immediate attention to issues.   I also asked to review the bills for common gas, landscape main, telephone #we were already paying for telephone), insurance, etc.   He said we could discuss items, but he wanted to manage the building.   We agreed that we would get together and discuss.   We weren't in the building yet.   

Months went by and nothing was discussed on the CAM fees and no bill was received.   Our office mngr mentioned it to the fellow who was continuing to fix issues after we moved in.   Another bill arrived and now the CAM was 3.5.  Management fees had been lowered to $750.   Telephone dropped from 125 to 85.   Insurance 175 to 160.   Common burden % has also changed from 13.51% to 13.63% - not drastic, but why the change.   

Our office manager called and asked me what we wanted to do.  

I called the owner of the rest of the building and he was angry that we hadn't paid.   I told him he could have called me, but we hadn't received a bill and I thought the ball was in his court to get a meeting together.   I again explained my concerns and mentioned that the CAM had dropped to 3.5 without notice.   He said he couldn't believe I would take issue with a drop in fees.   I said I took issue with the fact that we hadn't been notified and it was a concern that fees could change without notice.    

We have a meeting and he has implied that we don't have any rights because he owns 52.21% of the building and we own 47.79%.   

We have a contract, but we didn't have the CAM when we signed.   I assumed that we'd run the building together and he wouldn't be trying to make money from us.

Answer
As I read your e-mail, management fees for your building amount to $750 per month, or $9,000 per year.

I do have some personal insight to this matter: I own an office condominium (approx. 2,500 RSF) which is part of a project that totals 110,000 RSF. Our monthly property management cost is $2,100, or $25,200 per year, and we use a professional property management company. Each owner pays their pro-rata portion of this cost. This means that I pay approx. $50 per month, or $600 per year, for property management. I am also the Treasurer of the Board of Directors and keep a close eye on expenses.

Therefore, and based on this real life example, your property management expenses appear to be extremely high. I suggest you ask the other owner what tasks he performs that justify $750 per month to manage the property.  

If he feels strongly that $750/month is a reasonable amount you may wish to assume the property management responsibilities for this amount, and collect his pro-rata share.

Another area you should investigate is called "reserves", or the amount being assessed both owners for capital repairs to the common elements of the building.

Also, an annual operating budget should be approved by all owners (not just the majority owner).

In closing, the CC&Rs of the property should address voting rights. If the document is silent on this matter, and you feel the other owner is assessing higher-than-necessary fees (for his personal enrichment, a/k/a/ "unjust enrichment"), you should consult an attorney experienced with commercial property owner's associations.     

Steve