CAM Case Study

Challenge

Common area maintenance, or CAM, is the part of a commercial lease that should spell out exactly which costs are covered by the landlord and which are passed on to the tenant. It represents the cost to maintain the common areas of property in which all tenants benefit and includes everything from maintenance and landscaping to utilities, property taxes and management fees.

However, it’s not always very clear about what the costs entail and who should be responsible for verification. For example, if you’re the tenant, are you always aware of the going market rates for costs? As a landlord, are you incurring capital expenditure (capex) costs which may be passed through to your tenants? For either party, what happens when an unexpected event triggers a cost increase?

A highly qualified third party can address these grey areas to determine fair pricing and allocations. Skoda Minotti’s Real Estate group represents both landlords and tenants to ensure CAM costs are accurate, appropriate, recoverable and timely.

 

Tenant with Numerous Locations; Multiple Leases

Our client, the tenant, had 120 store locations with several versions of lease options. The tenant needed help sorting through the tangle of leases to determine whether the assessed costs were on point.

In this case, the tenant had specific questions they wanted to get answered:

  • Questions about contracts and invoices:  Tenants have the right to challenge costs to ensure they are accurate and arrived at fairly. They should also review the accuracy of contracts, independent from the landlord.
  • Uncover insufficient support: If expenses increase, where is the documentation supporting that snowplowing, real estate taxes or even garbage collection have actually increased?
  • Uncover inconsistent expense allocation:  What is the relationship with the other tenants? Has the allocation percentage changed? Specifically, has there been:
    • Reduction or expansion in the total lessor space?
    • Reduction or expansion in lessee space?

Solution

After reviewing all the leases, Skoda Minotti’s CAM experts found they generally fell within three consistent categories. While each lease and lessor is unique, the basic CAM allowance principles should be consistent.

We helped our client develop a roadmap for its audit program by telling them how to work effectively with their landlord. We also built in a system that ensured the timely reviews of leases.

We worked with the tenant to understand the right questions to ask to attain the critical information needed. For example:

Look at the allocation percentage each year. Did it change? Should it have changed?
Has the landlord passed along any discounts or rebates for items like utilities, real estate taxes and insurance? Is the landlord aware of such discounts?
Review insurance policies carefully: Are you over or under insured? Are you paying too much? Are you and lessor covering the same insurable items? You need to review the coverage limits of both your policy and the lessor’s. You also want to make sure your coverage limits are in line with your risk management strategies.

Results

Skoda Minotti helped resolve our client’s challenges by:

  • Categorizing the leases for greater efficiency
  • Defining the process for ensuring fair charges
  • Determining the right questions to ask to question charges in a timely manner

As a result, the tenant is now able to conduct the annual CAM audit process internally. They have a system for responding timely.

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