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Who Spends for What? Strategically Drafting and Reviewing Operating Costs and Common Area Maintenance Costs In Commercial Leases

DICTA Magazine
century21.com
Author( s) Grant T. Williamson

Business expenses (" OpEx") and common location maintenance fees (" CAM") are 2 important items in any commercial lease, however they are frequently ignored after the decision is made on how to divide up these charges. Typically, operating expenses are computed and designated based on a gross, modified gross, or triple net basis, with the occupant being accountable for a portion of CAM based on the percentage of the overall residential or commercial property they inhabit. The property owner will generally have standard lease language for each type of OpEx structure (i.e., gross, modified gross, or triple internet) and for CAM breakdowns. Once the property manager and renter concur that, for instance, the lease will be calculated on a triple net basis with occupant accountable for its proportionate share of CAM, let's say 20% for sake of illustration, landlord's counsel will generally just pull basic OpEx and CAM language from its term bank and call it a day. On the other side of the table, occupant's counsel will fall into the trap of just ensuring that the OpEx provision contemplates a triple net structure which the CAM breakdown correctly notes 20%. But taking this narrow approach to drafting and examining OpEx and CAM costs in industrial leases can open a pandora's box of issues down the roadway as expenditures start to emerge throughout the course of the leasing relationship and parties start to second-guess who must be spending for what.

It is handy to specify the OpEx structures mentioned above and to provide more information on CAM expenses. OpEx, in some cases described as extra rent, is meant to typically refer to all costs related to a lease beyond the base lease being charged. Freedom of agreement allows for the parties to choose how to break down OpEx, and the classifications of gross leases, customized gross leases, and triple net leases are the three techniques that can be utilized.

In a gross lease, the base rent is all that the occupant will pay. The base rent will be higher than the base lease under a customized gross lease or a triple net lease because the property manager is spending for all extra lease itself and has (hopefully precisely) calculated these costs into one general base lease rate that will allow the property manager to cover these costs and understand an earnings on the lease of its space.

A customized gross lease is similar to a gross lease because the base lease shows a few of the awaited costs of extra lease products but differs in that some of the common extra rent items will be paid straight by the occupant. As such, the base rent rate under a customized gross lease will be less than under a gross lease and more than under a triple net lease. For instance, a modified gross lease may supply that the base lease rate consists of the expenses of specific energies, which property manager will pay straight, however not others, for which obligation will fall on the renter to pay straight.

A triple net lease will have the most affordable rent rate of all because it prepares for that tenant will be accountable for all other costs connected with the lease and its operations thereunder. CAM, simply put, will encompass charges connected with areas that renter has access to, and rights to utilize, in common with other tenants at a residential or commercial property. These can differ widely depending on the kind of residential or commercial property, however generally consist of several of the following: parking lots or decks, shared corridors, public toilets, costs associated with landscaping at the residential or commercial property, and expenses related to preserving the residential or commercial property (however not connected with maintaining any facilities specifically occupied by any tenant of the residential or commercial property).

As you may be able to inform by these meanings, "costs" and "extra lease" and "common area" and "operating costs" are broad terms that might provide themselves to incorporating, or not incorporating, all way of different items under a lease. The last thing either celebration wants is for a cost that they are accountable for to come as a surprise, particularly in longer-term industrial leases. As such, whether you are preparing a lease for a property owner or evaluating a lease for a tenant, it is essential to ask the following concerns of your customer:

- Can you list out all the expenses that you anticipate to be responsible for paying straight? Are there any costs that you expressly do not anticipate to spend for?

• If the lease structure is not gross, what energies will the occupant be accountable for paying (e.g., water, gas, sewer, electric, telephone, and/or internet)? Are there cost savings associated, for example, with the landlord obtaining utilities for the entire residential or commercial property and then billing them back to occupant for repayment or through separately metering the tenant's properties to accurately split expenses, or is it more cost effective for the renter to contract for and pay for utilities straight? Will utility expenses be involved the definition of CAM?
• How will OpEx and CAM costs be evaluated: On a month-to-month basis per a set price quote? On a per square foot basis? Based upon actual costs incurred and then billed back to the renter for repayment? If these costs are not billed back for repayment, how will estimated OpEx and CAM costs be reconciled and changed: On a yearly basis? On a month-by-month case?
• For proprietors, will there be an associated supervisor entity carrying out services for the residential or commercial property whose fees should be recouped either through OpEx or CAM costs? For tenants, should management costs be left out or topped?
• For renters, based upon previous time in a structure and relationship with the property owner, is it worth trying to press for a cap on OpEx and CAM boost year by year (e.g., placing language that occupant shall not be accountable for the payment of any OpEx and CAM costs to the extent that they exceed X% of such costs for the right away preceding lease year) to ensure that property manager is incentivized to keep expenses affordable and also not to use the residential or commercial property as an earnings center? For landlords, has enough monetary analysis been carried out to commit to a cap without the danger of eating excess expenses down the road?
• How will capital enhancement costs be paid for? Will they be amortized over a specific time period, which is more common under a long-lasting lease or for a large, anchor occupant, or will property owner eat these costs (which they may not wish to do if they just have a leasehold interest in the residential or commercial property)?
  
  At the end of the day, clarity is crucial when it pertains to preparing and revising OpEx and CAM arrangements in commercial leases. While it can appear tedious to specifically consist of or exclude certain items rather than just adding a note that the lease is, for instance, a triple net lease and that occupant's share of CAM is 20%, taking the time to fully comprehend who should pay for what will help avoid conflicts down the roadway and keep your customer delighted.
  
  Republished with approval. This post was released in the Knoxville Bar Association's regular monthly magazine DICTA, January 2023, Volume 51, Issue 1.