CAM Charges in Leases – Don’t Get Ripped Off!
Most commercial leases are triple net leases whereby tenants are expected to pay for real estate taxes, building insurance and common area and maintenance (CAM) expenses in addition to rent and utilities. CAM charges should be carefully negotiated and delineated in the lease. A landlord will usually try to draft a lease to allow for the immediate pass-through of all costs incurred in its ownership of the property. CAM clauses in leases have become so broad that CAM charges can approach or even exceed rent payments. Expenses that are typically included in CAM are trash removal, management fees, landscaping, snow removal, fire alarm services and security services. Conversely, CAM charges do not typically include costs directly attributable to ownership or improvements that add value to the property such as attorneys’ fees for the lease negotiations, collection fees for other non-paying tenants and the installation of a new roof or lighting fixtures.
If a tenant does not insist on proper amortization protections in the lease, then a tenant may be stuck paying significant CAM charges. Consider the following, a tenant leases 10,000 square feet in a 100,000 square foot building making their proportionate share equivalent to 10%. The tenant has one year left in their lease, which does not require any capital improvements to be amortized. The landlord charges $100,000 in CAM expenses with a useful life of 5 years. The tenant is responsible for their proportionate share, equivalent to $10,000 ($100,000 x 10%). The tenant will only get the benefit of that capital improvement for one year, but will be required to pay the entire amount spent by the landlord at the landlord’s discretion. However, if the lease required the landlord to amortize capital improvements over their useful life, then the tenant would only be responsible for $2,000 in CAM charges ($10,000 divided by 5 years = $2,000 per year). The tenant may also insist during lease negotiations on the right to audit the landlord’s records on an annual basis.
The Internal Revenue Service (IRS) produces regulations that require property owners to capitalize or amortize the costs of certain improvements to property over their useful life. This means if a landlord installs a new roof which has a useful life of 5 years and costs $10,000, the landlord would only be able to deduct a business expense of $2,000 per year for the next 5 years. These regulations can serve as a good guide for what a landlord should amortize.
At Weiss LLP, we have extensive experience in leasing matters representing both landlords and tenants. If you need assistance in leasing or real estate matters, please call us at 202-296-2121 to set up an appointment today!
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