Most commercial retail leases are triple net leases. The “triple” stands for (i) taxes (ii) insurance and (iii) maintenance.
- Taxes: This is pretty straightforward, as the landlord will simply pass on to the tenant the real estate taxes proportionately based on the size of the overall property and the size of the tenant’s location.
- Insurance: This is calculated in a similar manner based on the landlord’s insurance cost for the overall property, not the tenant’s specific insurance.
- Maintenance: This is the big variable and is also called CAM or “common area maintenance.”
Basically, under a triple net lease, the landlord will pass through all of the expenses to maintain the property including landscaping, cleanup, snow removal and minor repairs to each tenant on a pro-rata basis. The CAM charges in a commercial lease are typically added on to base rent as additional rent (in addition to the taxes and insurance cost). This is an area fraught with danger for the unwary tenant. A landlord typically will try to pass through as much of their expenses as possible through CAM charges, and if not negotiated upfront, these expenses can grow and grow over the life of the lease.
CAM charges to be wary of are:
- Administrative & Maintenance Fees
- Roof Repair & Replacement
- Capital Improvements
- Electrical Wiring
Many of these charges should be considered capital expenses or general overhead of the landlord and should be excluded from CAM.
How to Minimize CAM Charges
There are many ways a prospective tenant can minimize CAM charges while negotiating the terms of their lease. A best practice is to negotiate a cap on CAM increases yearly so the tenant can realistically budget their occupancy cost throughout the life of the lease. Another best practice is to negotiate a fixed fee for CAM charges for each year of the lease. Note, however, that typically the cap and fixed fee arrangements will exclude snow removal in northern climates. Exclusions to items that the landlord may pass through to the tenant (for example, costs due to the landlord’s or another tenant’s negligence, capital expenditures), among others is another way to curb runaway CAM charges throughout the life of the lease.
In addition, it is recommended that the lease clearly define what can and cannot be included in CAM charges. Some items that we typically ask the Landlord to exclude (we have 28 items we ask be excluded) include costs of a capital nature, charges caused by other tenants or by the landlord or the landlord’s agents, costs which are depreciated, etc. All of these mechanisms can help to keep CAM charges at a predictable amount. It is also important that the tenant have the right to review (and if warranted, audit) the books and records of the landlord to see if there are inappropriate charges included in the CAM charges being passed through to the tenant.
As a tenant, you also have to be sure you have reasonable rights to examine the books and records of the landlord to determine if the CAM charges have been properly calculated in accordance with your lease. You may have negotiated some exclusions or even a cap on increases; however, the management of your shopping center may have lost track of your deal if it is different than your neighbor’s or may simply ignore it when sending out the annual CAM calculation. You need a simple way to find out the details behind the charges to ensure it is in compliance with your lease.
Negotiate Your Lease With Our Help
This post is meant to be a general guideline for prospective tenants related to the terminology and jargon of commercial leases and is not intended to provide legal advice for any particular situation. We would be happy to have a more detailed conversation with you if you have some questions on CAM charges or other clauses in your lease or prospective lease. Please call us at (215) 525-1165 or contact us from our website to speak with an attorney about your situation.