It’s that season again. The owner and vendor costs have been received. Next, time to work through the Common Area Maintenance (CAM) costs, calculate allocations, send notices and so on…. What are 10 things that owners/property managers and tenants should remember and act on?
1. Have all the CAM Costs been captured or received?
Even the best property managers often have to deal with deficient or late invoices and payment confirmations from vendors or accounting. Best practice is to make sure that all charges that are or may be considered CAM costs be presented to the landlord/owner so that end of year calculations can be calculated (see below). Clearly this is the time where PMs are considered personas non gratas for following up. But, such effort is critical.
2. Have you made the proper calculations?
Once all the information is received, the next big task is to correctly determine the amount of costs and the percentage allocation to each tenant based on their rented % of Gross Leasable Area (GLA) – or other formula if the lease requires a different approach. Beyond the checking and re-checking the pure math, a quick review of the proper percentages owed by all tenants is critical. An hour reviewing and confirming these figures can pay off in time spent and $$ disputes at a future time. Helpful tip: make sure the proper GLA is calculated – especially if there has been a change in the center, park or building during the past year. This is critical.
3. Have the capital improvements been segregated from CAM?
Even experienced folks involved in commercial real estate struggle with this issue. The best situation is where the form lease used by the landlord clearly defines CAM and other costs to be included in the formula. Excluding such a bright line as a reference, there should be a determination of what costs can and should be allocated to CAM; or are certain fees and expenditures the responsibility of landlord due to intentional or overdue improvements/repairs to the property. This could clearly be covered in detail in a separate post, but for today’s purposes the north star should be (if not otherwise directed by the lease provisions) did the repair/activity benefit all the tenants as part of maintenance OR is it a situation where the landlord unilaterally decided to make changes to the property that benefit a particular tenant or constitute deferred maintenance (i.e. replacement of 20-year old common roof or additional amenities requested by one tenant).
4. Have all the deadlines been met?
This requirement sounds elementary, but experience shows that often these dates are overlooked. Again, hopefully the date for submission of CAM reconciliations should be clearly defined and complied with. For tenants, make sure you know the deadline to contest any CAM reconciliation charges. The results for missing either deadline can be costly.
5. Is there any follow-up to responses from tenants?
Follow up on these responses is also key. Many leases require landlord to respond within a specific time to questions and objections sent by tenants after they have reviewed the CAM reconciliation report. Failure to respond in a timely fashion could result in a waiver of landlord’s right to refute or negotiate any differences the parties may have (see below). Again, a specific notation of the deadlines is key. And remember that even verbal responses may come back to bite ownership if not noted and properly addressed.
6. Audit Rights invoked?
Most large retail, industrial and office tenants will reserve the right to inspect, review or even require an audit of landlord’s CAM reconciliation reports in their leases. If invoked, this will require owners to maintain sufficient records of costs, calculations and allocations, as well as allow tenants to view overall operations related to the property. A solid plan of record keeping is the best protection against any extended disputes between the parties here. Costs of audit are often negotiated as well, so due care should be given to tenant’s financial responsibility and when this right/remedy is invoked.
7. Have payments been made or credits noted?
This seems too obvious to discuss. However, in the effort to operate and manage commercial properties, landlords often overlook this back-end task. Did the tenant pay too little based on the past year’s monthly
CAM estimates? If so, notice and request for payment of the deficiency should be sent out sooner rather than later. Did the tenant overpay the estimated CAM charges? If so, landlords should not sit on their hands, but rather properly credit tenants with the overage or refund the amount to avoid the spectre of a landlord default or a cudgel that a tenant can use to negotiate reduced rent or other settled terms of the existing lease.
8. Have proper and timely notices been given?
Does landlord have a schedule of notices and required CAM reconciliation deadlines and related times? If not, they act at their peril. For tenants, the same is true. If a deadline to object to CAM reconciliations passes without a proper response, the dispute may be rendered legally moot.
9. Are there any default or waiver concerns to be considered?
The timelines contained in the lease are the obvious primary concerns. But what if there are extenuating circumstances that may have separated the lease terms from the actions of one or both of the parties? In a classic example, what if landlord has routinely failed to comply with the deadline to provide a reconciliation report to tenant, but tenant has never objected to this failure to observe the strict time deadline? Result = competing claims of waiver of default and right to object/audit CAM reports. This is a no-win situation for all involved. Solution = make sure the deadlines are observed and if the other party fails to observe them, they are notified!
10. Has estimated CAM been set for 2015 and notice given?
Last, but certainly not least, has the landlord calculated the estimated CAM charges for the current year and given notice to the tenant (in the absence of a lease provision that controls this issue)? Not only is the new CAM estimate necessary to adequately enforce any increases in CAM payments, but also following up on full and timely payment is key to preventing future problems in the current calendar year.