The only revenue a landlord has is the rent, and the additional charges, it bills to and receives from the tenants. Landlords have to pay their own expenses, such as employees and supplies for maintaining the property. The landlord will charge the tenant a set monthly amount to contribute to these expenses, and at the end of the calendar year, the landlord should send a reconciliation, stating how much each expense was and how much the tenant paid toward that expense. If the tenant was undercharged, the landlord will definitely require a payment to recover those costs, but what if the tenant was overcharged? This is why an audit right is important for a tenant in a commercial real estate lease; if the tenant is overcharged, there has to be a way to prove it.
Before signing a commercial lease agreement, be aware of these 5 expenses that landlords want to pass on to tenants!
Administrative and/or management fee
It makes sense that the landlord needs administrative assistance to run the shopping center, or needs to pay a property management company to do so. So why would a landlord charge both costs? It’s okay to pay one or the other, but it’s important to resist paying both. Rates are usually between 5-15%, although those have been on the rise, or if it is a percentage of gross rent, it’s usually capped at 3-5% of that cost. It’s important to negotiate for what cost will be paid and how much that cost is.
A capital cost is recovered over a long period of time, which may be longer than the term of the commercial lease. The landlord will recapture the entire expense, but not the tenant. A capital replacement is a fair cost to share, since the tenant has an interest in the property being properly maintained, but a capital improvement is an increased cost that usually benefits the landlord. The only exception would be a capital cost that is meant to decrease other costs (such as a new, more efficient HVAC) or a cost that the government imposes (such as ADA compliant staircases). The tenant wants the property to be run legally and efficiently, but not upgraded, at its expense.
Reserves or slush funds
This is basically interest-free money for the landlord. It makes sense that the landlord would want to have a pool of pre-collected funds hanging out that it can spend on whatever it wants, but how does that benefit the tenant? The tenant should pay for actual costs incurred, not anticipatory costs that might not even accrue until after the lease agreement is expired! If the landlord wants to replace the roof, it should budget for doing so and charge each tenant based on its proportionate share of the actual cost, and not guess and charge the tenant for what may, or may not, be the right amount. And what expense is the landlord charging for that isn’t part of CAM or OpEx? Tenants should be very wary of paying into a reserve fund.
Some costs belong to the landlord, and those are the costs of ownership. The tenant should contribute to costs to maintain, manage, repair and otherwise keep the location running, but the landlord entity should pay for its own taxes, legal and accounting costs for its existence, etc. If the landlord chooses to decorate the building with fine art, or to make political contributions, those aren’t expenses that should be passed on to the tenant, either.
If the tenant has requested a CAM cap, it’s important that it’s not only in the lease contract, but that the tenant actually does the math and reconciles all of the bills. It’s entirely possible that the landlord made an error and did not calculate the increase correctly based on the CAM cap, or expenses that should not have been included were included in the calculation.
There are plenty of legitimate costs that tenants should contribute to, but beware of costs that should belong to the landlord! Sign up for a no-obligation discovery call with The Law Office of Jenna Zebrowski, PLLC to learn more about costs.