Ever since the first lease was signed for a space in a self-contained shopping center, landlords and tenants have been at war over who should pay for the costs of maintaining common areas and operating and managing the center. The battles have reached such a pitch that some landlords and tenants are considering a truce.
In a typical shopping center, the landlord owns most if not all of the land; builds buildings to house tenants (except in cases where major stores own their own land and build their own buildings); and provides parking, sidewalks, lighting and, in enclosed malls, interior walkways and climate control. Tenants expect to pay rent for use of the building space and will agree to maintain and repair it while they use it. But who should pay for the upkeep of other areas, those owned by the landlord but used jointly by tenants and their customers? What should be included in those costs?
Fair costs for tenants Tenants will generally agree to share the cost of maintenance and repair of the parking lot (including lighting and landscaping), the sidewalks, the enclosed malls, and public amenities like restrooms. These areas are clearly used by the tenants' customers. The condition of these areas has a direct impact on the likelihood that customers will frequent the center.
Smaller, in-line mall tenants usually are required to pay for the operational and management costs as well: the salaries of the center manager and on-site staff, liability insurance costs, costs for promotional activities, and legal and accounting services. Bigger boxes usually fight hard to avoid these extra costs.
Many tenants also reimburse landlords for their off-site management fees by paying an administrative fee based on a percentage of the total CAM costs. Savvy tenants will reduce the percentage (which ranges from 25% to 5%), and exclude non-maintenance-type costs from the calculation (e.g., taxes, insurance, utilities).
A major area of contention is the cost related to the buildings of the center, such as maintenance, repair and replacement of roofs, building foundations and exterior walls. Tenants argue, sometimes successfully, that these are not truly common areas used by their customers. The landlord already gets income from those buildings in the form of rent. Any costs of maintaining and replacing them should be paid by the landlord out of rental income.
A tenant can try to reduce these costs by limiting the inclusion of replacements (vs. just a maintenance or repair item) or capital expenditures. Landlords sometimes agree to limit the amount of these capital expenditures they expense each year, either by agreeing to amortize these costs over a number of years (or, for a strong tenant, over the useful life of the improvement), or by limiting the amount of actual capital improvement dollars that will be charged in any given year.
Tenants also decrease their CAM costs by getting caps on annual increases; limiting the amount of gross leasable area landlords can deduct when calculating a tenant's pro rata share (e.g., department stores, freestanding buildings, kiosks, theaters); and requiring that their pro rata share be based on leasable space, or at the very least, a minimum amount of occupied floor area.
An agreeable solution Some landlords are considering permitting tenants to pay a fixed dollar amount toward CAM (analogous to a fixed minimum rent amount) that would increase annually at an agreed-upon rate not tied directly to the increases in the landlord's costs from year to year.
In this way, tenants add certainty to their pro formas. Landlords, by not tying the CAM charge to the actual CAM cost from year to year, hope to avoid lengthy battles over CAM exclusions, caps and the like in lease negotiations. They also prevent costly audits by tenants seeking to confirm compliance with the negotiated lease provisions.
The key for the landlord is the ability to forecast its annual CAM costs for the term of the lease when negotiating that fixed CAM payment and fixed annual increases. For this kind of truce on CAM costs to be successful, landlords will have to sharpen their pencils and polish their crystal balls.