Reimbursable expenses typically include Common Area
Maintenance (CAM), Taxes and Insurance. Reimbursable expenses can account for 33% of
your total rental payment so it is important negotiate the terms in the lease. The expense reimbursement terms are just as
important as negotiating the lease rate.
We will concentrate on CAM
reimbursements.
CAM
expenses typically include items that require maintenance and/or repair that
are commonly used by all tenants within a certain property. Examples of those costs would include
landscaping, building maintenance, security and cleaning. Those costs will vary
from month to month and year to year.
Some costs are controllable while others are uncontrollable by
landlord. Tenants can mitigate their
risk and cost by properly negotiating the terms in which CAM
is reimbursed.
Negotiating Points of
CAM Reimbursements
Controllable Expenses
Controllable expenses include expenses that landlord can
directly control the expense cost.
Landlords can control the expenses on landscaping but landlords do not
control increases in real estate taxes or utility costs. Tenants should limit the annual increase for
controllable expenses to around 3% or an inflationary index. The limit or cap
should be annually and not compounded.
Costs To Exclude
ADA Compliance Costs, Leasing Commissions, Capital Expenses,
Roof Replacement Costs, 3rd Party Reimbursed Costs, Correction of
Construction Defects, Fines & Penalties.
Management Fees
Management fees are common with most properties and are
reimbursed by tenants in most cases.
Management fees are usually a percentage of income or a set fee. A tenant should limit the fee to what is
considered a market fee or an “arms length” fee. A market fee will vary from market to market
and product to product. Professional
advice might be needed to determine a market fee.
Right to audit CAM
reconciliations (Past & Present)
Landlords usually don’t like to get audited and will restrict
tenants from being able to audit their books.
A tenant should allow a reasonable window of time to review all
reconciliations sent by landlord. A
tenant should be allowed to audit previous statements especially if an audit
discovers an error that might impact other years.
Gross Up Provisions
Landlords will gross up the occupancy to around 95% for
determining a tenant’s share of reimbursable expenses. If a property is only 50% occupied and the
landlord splits the cost equally among the existing tenants then the tenant
could be paying twice as much in reimbursable expenses. A gross up will protect a tenant from
increased expenses in a low occupancy property.
“Arms Length” Transactions
Landlord should conduct all business concerning reimbursable
expenses as “Arms Length” transactions.
Meaning a landlord shouldn’t over pay a “relative” for a service that
could have been done for less money and with the same quality.
Income Offsets
Landlords will sometimes receive income for allowing a 3rd
party or existing tenant to use some of the common area. If a carnival rents out part of the parking
lot that is considered common area then that rent income should go to offset
some of the expenses. If tenants are
helping maintain those areas then they should benefit from any income coming from
the use of those areas.
Determination of Pro Rata Share
The tenants pro rata share of expenses is usually their leased
space divided by the total rentable area.
The denominator can sometimes change based on the expense type. If an anchor tenant has a designated parking
area that the anchor tenant is responsible for then that anchor is probably not
responsible for the rest of the parking area.
The denominator for the rest of the parking area would be the total
rentable area minus the square footage of the anchor tenant. The non-anchor tenants would then split the
cost for the non-anchor parking area.
Payment Terms
Are payments going to be paid monthly or annually? Are payments made directly to a service
provider or through the landlord? Are
payments made upon incurring such costs?
Typically, a landlord will make an estimate at the beginning of the year
to determine that year’s monthly expenses.
A landlord might make an adjustment for an increase in costs during the
year.
Notice of CAM
Changes
An increase of cost or a new cost over a certain amount
should be disclosed at the time of the cost and how it will impact the tenant’s
reimbursable expenses. Tenants do not
want a surprise at the end of the year.
At the beginning of the year, most landlords will estimate
the total cost for CAM
for the coming year. Each Tenant will be
responsible for their share of estimated CAM costs based
on their lease. Landlords will try to
cover as much CAM
costs as they can through CAM
reimbursements. Annual CAM
reconciliations should be reviewed every year.
CAM Reconciliation: A Yearly Task
In Saving Money at
Is it wise to discuss
your CAM reconciliations with other tenants?
Absolutely, share information if your lease allows you to
share information with other tenants.
Beware that other tenants may have different terms than your lease and
could lead to different reimbursement amounts.
Learning those terms can help you with your next lease negotiation.
If a tenant doesn’t feel comfortable or doesn’t have the
time to negotiate their CAM
expenses or lease terms then the tenant should seek professional advice.
Note: Each state and each market will differ from
other states and markets. It is
advisable to ask a real estate professional any questions you might have about
a leasing commercial space. The above
article used general terms which could apply to your state or not. LeaseWithEase provides free consulting to our
clients who use our free website to find their office, retail or medical office
space.
Take A Test Run On
Market Data
Fell free to go to www.leasewithease.net
and test our site for selecting office, medical office and retail space. All you need to do is select “Test” submarket
when entering your search criteria. For
more information please go to www.leasewithease.net.
The Move
Need help with preparing for “The Move” then feel free to
contact LWE with any questions or if you need a referral for getting your
office moved and set up smoothly.
Tenant Vendor List
LeaseWithEase can provide a vendor list to tenants seeking
contacts for installing a security system or a contact for a coffee vendor.
Also, if your company offers services to office, medical office or retail
tenants we would like to include your company in our vendor list for our
clients. Feel free to forward information
about your company and what you provide tenants.
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“Bringing The Local Real Estate
Market To Your Desk”
Alan Gore
Partner
Texas
Broker License #0449773
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