| Stop the problem before it starts |
Fixed CAM
"Fixed CAM" became the rage over the last decade and its leading proponent was General Growth Properties. Now that GGP is in bankruptcy - and will likely to be for some time - what happens to the fixed services that were to accompany the fixed price? Obviously, retailers have to become even more vigilant about the quality of shopping center services, particularly security and maintenance. If you suspect that your shopping center is not getting the attention it deserves, find out how much the landlord had budgeted for those services in past years and compare that to what it’s spending now. If it’s a landlord in bankruptcy, you can easily find out this information by serving a Rule 2004 "Request for Examination."
How can you insure that the landlord will maintain the condition and security of the shopping center?
In part, by listing all of the services the landlord is expected to provide.
IN ADDITION, the lease needs to make clear that the shopping center will be operated, managed and maintained in a first class manner.
If you’re a strong tenant or a strong negotiator, try to insure a minimum, baseline of operating cost expenditures by the landlord, based upon the per square foot charge you are being asked to pay times the leasable GLA.
Ten Tips to Reduce CAM Costs
1. Limit CAM to costs related to the “common areas;” not the “Shopping Center.”
2. Identify CAM exclusions specifically. Exclude all original construction, utilities and fixtures. Don’t pay reserves and don’t pay for the food court. Don’t agree to pay for “remodeling” “renovations” or “improvements:” exclude, “costs of a capital nature to the extent they improve the Common Areas to beyond their original condition or utility”
3 Watch what you agree to “replace.” Don’t agree to depreciate “All Expenses in Excess of $200,000” (especially after you’ve limited capital expenses), but DO insist on depreciation of what you have agreed to over its “useful life.”
4. Make sure you exclude all “off-site expenses,” and make your administrative fee charge inclusive of landlord’s overhead and administrative costs. When you’re negotiating your lease, ask the landlord what the “administrative fee” is intended to cover.
5. Define management fees, if any, clearly and specifically. ASK if there is a management charge based on revenue, collections, etc., and exclude it if you can. If you can’t, make sure there is “no duplication” of charges.
6. Make sure that GLA exclusions are “operating stores.” Have outparcels and “non-fronting” GLA, especially theaters and 24/7 operators, pay their share of “exterior CAM.”
7. Don’t include taxes, insurance and utilities as an “operating cost,” but if you do, make sure they’re not part of the “administrative fee.” And watch out for “administrative fees tacked on to utility charges.
8. Utilities: try to pay no more than landlord’s unit costs. At a minimum, agree to pay no more than what tenant would pay if metered directly (but not the same “rate”). Always get a right to checkmeter and adjust.
9. Do not negotiate an audit clause if the lease is silent. If you do negotiate an audit clause, make sure that it covers at least three prior years, and nothing becomes “conclusive.” Include attorneys’ fees and audit costs; don’t agree to exclusive jurisdiction where the shopping center is located.
10: “Fixed CAM:” Don’t agree to 5% increases; don’t agree to compounded increases; and don’t agree to cumulative increases. Always audit first, or get a copy of the prior year’s bills.
SAMPLE LEASE: SETTING A FIXED CAM CHARGE
a. Initial CAM Charge. For the first annual Accounting Period following the Commencement Date, Tenant shall pay in equal monthly installments a CAM cost payment of $[insert amount] (“Initial CAM Charge”).
b. Audit of CAM Costs. At the end of the first annual Accounting Period, Tenant shall be provided a reconciliation of Center’s actual CAM Costs (“First Reconciliation”). Tenant shall have a right to audit said CAM Costs for the first annual Accounting Period as long as Tenant provides notice of its intent to exercise said audit right to Landlord within [insert #, e.g., 60] days of its receipt of the First Reconciliation. Tenant must then provide Landlord with a written report detailing any objections to the CAM Costs within [insert #, e.g., 90] days of the date on which Landlord provides the books and records necessary to audit the CAM Costs.
c. Fixed CAM Charge. For the remainder of the Lease term, Tenant shall pay a Fixed CAM Charge, which shall be determined as follows:
(i) If Tenant does not exercise its audit right, the Initial CAM Charge will become the Fixed CAM Charge, which shall be fixed and increased annually in the manner provided herein.
(ii) If Tenant does exercise its audit right, Landlord and Tenant will make a good faith effort to agree on an adjustment to the Tenant’s Initial CAM Charge to reflect the audit’s findings, if necessary, which shall become the Fixed CAM Charge and thereafter be fixed and increased annually in the manner provided herein. In the event, Landlord and Tenant cannot agree upon adjustments to Tenant’s Initial CAM Charge, Tenant shall continue to pay the Initial CAM Charge and annual increases as provided herein until such time as Landlord and Tenant either agree upon a Fixed CAM Charge or the Initial CAM Charge is revised by order of a Court or other tribunal.
| Operating costs should only cover the common areas |
Operating costs should only cover the common areas. If the landlord wants the operating cost section of your lease to cover the shopping center, then don't be surprised if you're billed for off-site costs, billing, legal, architects, etc., most of which has nothing to do with the operation, management or maintenance of the common area. Also, if the lease says "shopping center," it will be a lot easier for a landlord to convince a court that it can pass through the fee it pays to its (usually affiliated) management company.
Want more ideas? Ask us at info@retaillaw.com
No retailer can afford to overpay its landlord. If you are concerned about your occupancy costs, please click the link to Total Occupancy Solutions, the first and only CAM audit company that combines legal and retail expertise under one roof!
