As we approach the end of the first quarter, tenants on “net” leases are preparing to deal with annual operating expense reconciliations from their Landlords. If you are a commercial real estate tenant and don’t know if you’re on a “net” lease, or don’t know what I mean by a reconciliation, you could be in for a surprise. If you are paying any one or combination of Common Area Maintenance (CAM), Tax, or Insurance to the Landlord then you’re on some form of “net” lease. For the context of this article I’ll be focusing on CAM relative to retail leases, although many of the same principles can apply across other asset classes.
So, what is this Common Area Maintenance you’re paying for, and why is it being reconciled? My own quick definition of CAM is maintenance, repair (and often replacement) of portions of the shopping center that are for the benefit and use of all tenants in the center and their patrons. Reconciliation refers to the adjustment required at year-end to make the sum of the CAM estimates you paid (or were billed) equal to your share of the total CAM expense for the property. If you’re wondering why I’m not quoting some official source or dictionary definition…guess what? Common Area Maintenance is already defined in your lease and will vary widely, so it doesn’t matter how I define it as much as it does how your Landlord and your lease define it. As they say, the devil is in the details, and you may be shocked by how much gray area lies between the lines of your lease.
This is often a hectic time of year for both Landlord and tenant; there may be multiple things happening at once. You may be getting new estimates that change your monthly payment, and on top of that getting billed for the difference in those payments. At the same time, you’re getting these reconciliations and invoices and it can quickly get overwhelming, especially if the numbers are not in your favor. This is an exhaustive topic that I plan to continue covering in more detail, because the process can be as simple or as complex as your Landlord or management company makes it.
I envision this as the first introduction into a series of entries that will provide insight and knowledge to help business owners. I also expect following topics to be more specific and targeted, but we needed a starting point. If you’re frustrated, or something doesn’t make sense and the Landlord isn’t responsive, I may be able to help. Let me discuss what options, if any, you might have. If you would like to learn more about this and other topics that are of benefit to commercial tenant’s then I urge you to follow this page, give it a like, and share it with others. The depth and scope of these entries will depend largely upon the feedback of you.
By: Chris Burnett, Commercial Sales & Leasing, Denton Realty Company