Taking up from my last column, I’m talking with Jim, owner of a traffic school, Fun While Drinking and Driving, about a lease he’s thinking of signing for his new location.
We’ve already discussed renewal periods (were there any and at what rate?); forced relocation (the landlord can move a tenant to new location without tenant’s consent);tenant improvement, or TI, work (was there any, how much, and amount of work necessary to get an occupancy permit); when the tenant has to start paying rent; exclusivity clauses (which vary in effectiveness and extent); and personal guarantees.
Then we reached the topic of CAM charges.
CAM stands for Common Area Maintenance. The Common Area is any space that is not part of a tenant’s premises, and that is open to all tenants or visitors to the building orlocation.
For instance, in an office building, the hallway that leads to the various offices is considered Common Area. Or, in a mall, the corridors you walk to go from store to store or the restrooms that are not inside a specific store. One organization defines Common Areas as those areas and facilities that are for the general non-exclusive use by the landlord, tenants, and invitees of either. Another typical Common Area is the parking lot. Now that we know what we’re talking about, the tenant must realize that even though he or she won’t always (and perhaps may never) use these areas, the tenant remains responsible for helping to pay for the maintenance, upkeep, repair, and, in some instances, replacement of these Common Areas.
“Okay,” Jim said, “That seems fair. What’s the big deal?”
“There are several big deals,” I responded and went on to describe a few of them. For instance, determining what portion of CAM charges each individual tenant is responsible for can be an issue. Tenants commonly respond, “I should pay whatever portion of the overall project my [store/shop/office] is.”
For example, if a tenant rents a 2,000-square-foot office in a building that has 24,000 square feet of space, many tenants believe their portion of the CAM fees would be one twelfth, about 8.4%.
But that’s not always how it works. Some landlords won’t use a tenant’s percentage of overall space but only the tenant’s percentage of overall rented space. Applying that formula to the example above, if only 20,000 square feet have been rented, the tenant’s share of the CAM rises to 10%.
And sometimes in malls or shopping centers, to entice more prestigious anchor stores (e.g., Nordstrom, Macy’s, etc.), landlords will agree these tenants don’t have to pay as much for CAM charges as the rest of the tenants, who have to make up the difference. So, it’s important to know exactly what part of the overall CAM charges you’ll be paying. It’s also a good idea to get the right to audit those charges.
Two other quick points:
1. Make sure you understand what’s included in “CAM fees.” For example, are you going to pay the landlord an administrative fee to figure how much it gets to bill you? Or, to put it another way, are you helping to pay the salary of the person who’s going to be hounding you to pay your CAM fees?
2. When do you pay the CAM fees? Normally, once a month. But, remember, you’re paying an estimate of what the annual CAM fees will be over the coming month and year.
Many landlords do a year-end reconciliation after they’ve figured out exactly how much the fees actually were. This reconciliation can result in a significant reconciliation bill to the tenant, who often has not budgeted for this expense. After all of this, Jim conceded that it was a good idea to pay to have the lease reviewed before signing anything. ©