CAM Cost Considerations for Franchise Tenants
Common Area Maintenance (CAM / Operating Cost) charges for tenants come in two flavours: honest mistakes or dishonest calculations. In a building where the property is fully or close to fully occupied, the landlord may have less reason to try to profit from Common Area Maintenance charges but may still try to enhance the property with the tenant’s money.
When a commercial property has several vacancies, the landlord, typically, will be responsible for paying his proportionate share for the vacant units. Some landlords try to avoid paying for any of the CAM charges on the vacancies by adding language into the lease agreement that spreads out the obligations for the vacant spaces amongst the current tenants. In some situations, franchise tenants can be carrying a very heavy financial burden if the property is not fully leased.
Ideally, you are able or were able to negotiate concise and reasonable CAM language in your initial lease with your landlord. That said, even the most detailed lease may result in issues with CAM so communicating with your landlord (both verbally and in writing) about any CAM concerns you may have is imperative. And don’t wait too long to ask your questions because your lease may stipulate a statute of limitations on adjustments. Sometimes the problem comes from the property manager; however, at other times, it originates from the owner or landlord taking advantage of tenants.
Franchise tenants should consider the following points:
Classifying Common Area: Common area is the area of a building used by all tenants and their customers. Examples of common area include lobbies, corridors and restrooms. Parking facilities, malls, sidewalks, landscaped areas, public toilets and truck and service facilities may be included as common areas when calculating the tenant’s share of building Operating Expenses.
Negotiating the Operating Costs as Rent: You may well hear from most commercial real estate professionals that Operating Costs are not negotiable; there are, however, aspects of Operating Costs that can indeed be changed to the franchise tenant’s favour. The landlord wants to make sure that the tenants pay for all the Operating Costs for the property. There’s nothing unusual about that. But when The Lease Coach analyzes Operating Costs for groups of tenants in a building, we frequently find that the tenants are subsidizing capital improvements that the landlord is using to enhance or increase the building’s value. Negotiating to cap increases to certain costs or excluding certain items from Operating Costs can help keep these in check.
Looking at What You’re Paying For: The majority of commercial lease agreements may stipulate the specific components of the Operating Costs that the tenants need to pay for. Typical examples include general maintenance, painting, lawn cutting, snow removal, property insurance and so on. Almost every lease agreement has an Operating Cost clause and typically defines these Common Area Maintenance charges in a short – or long-form manner. From a franchise tenant’s perspective, longer is better because it creates certainty.
Understanding why Proportionate Share Counts: If a tenant occupies seven percent of a commercial property, they can typically be required to pay seven percent – their proportionate share – of the Operating Costs as additional rent. Have your proportionate share of the CAM costs (as a percentage number) actually stated in the lease agreement. But not all tenants used Operating Costs proportionately. For example, is there was a common water meter, would a hair salon or a bank use more water? In cases like this where there may be a disproportionate use of a service, you may be able to modify certain aspects of Operating Costs to require a separate meter, check meter, or a more reasonable way to calculate such costs. And don’t be afraid to question or dispute the Operating Costs and your proportionate share.
For a copy of our free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail your request to JeffGrandfield@TheLeaseCoach.com.
Dale Willerton and Jeff Grandfield - The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals FOR DUMMIES (Wiley, 2013).