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Commercial Real Estate Investment/CAM charges
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Question
Our contract with a tenant says they share in the parking lot maintenance and repair via the CAM expenses. We had the parking lot milled and repaved with asphalt and restriped. The tenant says this is more than maintenance and repair and does not want to pay anything. The repaving was about $15K vs. $5K for the normal cost of a seal and restripe. To further add to the situation, it was discovered that the base needed to be thicker to support the traffic, a drain line and drain to reduce the watershed, and encapsulating of city pipes in concrete per new city codes so the price went to $30K. How should I handle this?
Jeff:
Reasonably determining if an expenditure was maintenance or capital improvement is often difficult. There are many tests that you can apply to help classify seemingly ambiguous expenditures.
I believe that the subject work creates a better base and overall higher quality parking lot, improving the parking lot beyond what was apparently in place before the most recent work was done. For this reason, it seems that the work is more a capital expenditure than maintenance. Contacting a CPA may provide additional information on this question.
Additionally, if the lease language does allow for assessing the tenant for capital costs, consider if text of the lease requires the tenant to pay their ratable share of the aggregate cost of the parking lot work in the comparison year following full payment for the work or if the overall cost is intended to accrue and be assessed as CAM to the tenant over the "useful life" of the recent parking lot work.
For example, if the useful life of the work is determined to be five (5) years, does the lease text prescribe that the landlord assess the tenant for its ratable share of 1/5 of the expense each year? If the tenant has only one year remaining on their lease term in the year following the landlord's payment for the complete lot project, the tenant will only reimburse for its' 1/5th ratable share that applies to the last year of their lease.
Note that many leases also contain text that is often topically referred to as a "Compliance with Laws" provision that will commonly - though not always - require tenants to pay a portion of improvements made by a landlord to a property so that the property will meet upgrades stipulated IF, AND, AS REQUIRED in "...new city codes...". Does the subject lease contain equivocal language?
Good luck.
-Jim
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Answers by Expert:
Jim Avancena, CPM
Expertise
Best qualified to answer questions that involve commercial leases, that is, basic issues as well as the often unexpected effects of the complexities and inter-relationships of the provisions a lease may contain, explain how seemingly innocuous text in your lease can have a major impact on a Tenant or Landlord and their business operations, and the common practices utilized in the industry. I can untangle most matters that may come up from the time a tenant begins searching for a office or store space and the lease acquisition process, concerns related to remodeling/improving the leased premises, moving-in, subletting or assigning the leased space, and a long list of problems that may come up during the lease term and even after a tenant moves out. I have practical experience with most property management issues and resolving landlord and tenant disputes - especially those involving what may appear to be overcharges assessed for additional lease charges like CAM costs, operating expense reimbursement, real estate taxes, utilities, construction improvements etc. Note that I am not an attorney and cannot provide legal advice.
Experience
Thirty years active experience in the commercial real estate industry as a licensed real estate broker in the Washington DC Metro area (DC, Northern Virginia & Maryland). I have been admitted (approved) by the Maryland and DC courts to testify as an expert witness on the subjects of Commercial Leasing and Property Management in the area of standard industry practices. I have had a business for the last 14 years advising virtually every form of business entity from large national corporations to the smallest ma & pa new businesses regarding a wide range of commercial real estate matters in addition to property management and commercial leasing.
Organizations
Currently my three children keep me so busy that it is difficult to participate in organizations with continuing and specific time requirements.
Publications
I publish a local commercial real estate newsletter titled: "Tenants First". My firm was the subject of a high profile Washington Post business section cover page (2.25 full pages) feature story on January 13, 1993; titled "Overcharging Overhead".
Education/Credentials
BA in Political Science from Memphis University, and five years of study in the real estate development summer program at MIT. I was certified as a commercial property manager (CPM-IREM), and currently hold a brokers license in Maryland and the District of Columbia.
Awards and Honors
The same plaques and honors that most others in my industry have earned. I have none that I consider especially meaningful.
Past/Present Clients
Past clients include: The World Bank, George Washington University, National Association of Criminal Defense Attorneys, US Department of Commerce, The American Benefits Council, K-Mart Development, many law firms, a national union, other major organizations, and many, many small business firms and retail operators that I am most honored to serve. I estimate more than 1,500 firms/organizations.
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