Commercial Real Estate Blog by Madison

CAM Negotiations – What You Need to Know before Signing, Part 2

It is news to no one that CAM charges can be a contentious issue for Landlords and Tenants alike.   Generally, Landlords want the CAM clause to be broad and all-encompassing, covering the Landlord’s costs of ownership, management, maintenance, repair, replacement, inspection, improvement, operation, and insurance of the property together with any costs allocated to administration and overhead. The Landlord benefits from a highly expansive CAM definition to avoid the risk that any necessary costs of operation have no corresponding revenue to cover them.

Tenants, on the other hand, generally understand that they need to compensate the Landlord for operating and maintaining the center. But they view the Landlord’s ownership costs as part of the Landlord’s cost of doing business and not a recoverable operation cost.  This “maintenance versus ownership” struggle shapes many of the issues relating to inclusion in and exclusion from CAM costs

When entering CAM negotiations, there are, thus, many considerations for both Tenants and Landlords.  Let’s consider some of the questions Landlords should contemplate when negotiating CAM.

Are management and administration fees included in CAM charges?

Management and administration fees are often tacked on as extras. It is understood that there are fees involved in managing the property’s expenses. Management fees go towards the salary for the secretary or property manager. This may not be an operating expense, per se, but it is reasonable to include it within CAM fees.   An administration fee is usually calculated as a percentage of the total operating expenses, between 5 and 10%.

Are the typical property expenses being passed on to the Tenant?

Specific expenses can be included in the Lease CAM provision, according to the nature of each property. For example, if a property is located in an upscale neighborhood where landscaping is very important, the Tenants’ leases may include the associated cost for upkeep of the grounds. Or a property situated in a snowy area may include snow removal fees within CAM. It is important to focus on these typical expenses and make sure they are being passed through to the Tenants.

Who is allowed to perform the CAM audit?

While the Tenant has the right to audit the Landlord’s expenses, there should be guidelines in place for who performs the audit.  The audit should be performed by someone who understands how lease language translates into quantified amounts. At times, the lease language may limit who is allowed to perform the audit. Most notable is the exception that no contingency fee companies may perform the audit.

Who pays for the CAM audit?

The question of footing the bill for the CAM audit lies in the percentage of error. Typically, the Tenant takes care of the audit and he pays for it. However, if the audit shows that the Landlord was overcharging by a high percentage, typically 5% or more, then leases many times provide that the Landlord should pay for the audit in this scenario.

Are you capping your CAM?

CAM caps give Tenants some predictability over their costs for the coming years. Landlords can include a first year CAM cap, as well as an ongoing cap. A first year CAM cap assures that the starting CAM will not exceed the amount declared in the initial lease negotiations. An ongoing CAM cap provides leeway for the Landlord to increase allowable expenses to account for inflation and normal growth. A CAM cap will help each side to negotiate the lease with more security and assurance.

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