There are three main expenses that each landlord has to pay. The only source of income for the landlord is the rent that is paid by the tenants, so either the costs will be included in the cost of rent (gross lease) or they will be charged separately and the tenant pays its share of each separate cost (net lease).
Taxes
This is the cost of owning the property and having services, like water and electricity, connected to it. Landlords should protest the property taxes regularly, and if they don’t, the tenant should have the ability to do so. The newer the property, or the more improved it is (such as when there is a new buyer that remodels the location), the higher the taxes will be. The tenant will be responsible for its own personal property taxes.
Insurance
The landlord needs to pay the cost of maintaining the insurance coverage (the premium) and in the event the insurance is used, there is a deductible, which is the amount of money that needs to be spent before the insurance will cover the rest of the cost. If the landlord has a mortgage, the insurance coverage will likely be dictated by the lender. If the tenant is contributing towards the insurance cost, make sure the landlord actually has insurance! The tenant needs to insure its own personal property as well. Any activity of the tenant that increases the landlord’s insurance cost will also be the tenant’s responsibility.
CAM/OpEx
This is either a very long (or very short) list of all of the expenses that the landlord has that the tenant is expected to contribute to. CAM refers to “Common Area Maintenance” expenses. This is different from “Operating Expenses” (or “OpEx”). Operating expenses are the cost of running the entire commercial building or facility. CAM refers to the cost for the parts of the property shared by tenants and their guests or customers. A tenant will usually see CAM in a retail or shared space, like a shopping center, while OpEx tends to be in a location like an office building.
Most of these expenses can be shopped around for by the landlord, and are known as controllable expenses. There are two ways to get more predictability in this cost. In its commercial lease agreement, the tenant can request a maximum amount of increase, known as a CAM cap, for these expenses. Alternatively, the parties may agree that the tenant will pay the increase over a base year (which is usually the first year of the commercial lease agreement), which is more common for an operating expenses scenario. In this case, the tenant would pay no OpEx for the first year of the lease, but in subsequent years, as costs rise, the tenant is responsible for its share of the increase every year during the commercial lease term.
Some of the costs are simply not controllable, and tenant will pay the increase, whatever it is. These costs usually includes taxes and insurance (if those are paid as part of CAM or OpEx) utilities, and snow and ice removal. The landlord will sometimes include an administrative and/or management fee, as well, and that amount should be a fixed percentage, such as a 5-15% fee, or a percentage of gross rent, usually between 3-6%.
Finally, since the landlord is billing the tenant for the costs, the landlord should send a bill at the end of every calendar year with a reconciliation- the amount that is budgeted for these expenses versus the amount that is actually spent. The tenant should review the bill and make sure that there is no overcharge (or undercharge) for the costs, and to ask for documentation if there is any uncertainty. The Law Office of Jenna Zebrowski, PLLC will help negotiate to control the tenant’s cost.
