LEASE AGREEMENT REFERENCE GUIDE 920: MORE STRATEGIES FOR OPERATING AND CAM COSTS $49.95
MORE STRATEGIES ON OPERATING AND CAM COSTS
This LARG focuses upon operating expenses and CAM costs. The first section looks a base years, base amounts, and expense stops from a tenant's perspective. The next two parts look at expense stops with regard to first year contributions and the effect of high vacancy rates on the prevalence of expense stops. Finally, the Lease Clause Critique examines three alternatives to the normally heavy negotiations and drafting that attend operating cost inclusions and exclusions--a most favored nation treatment for operating costs, fixed contributions by the tenant, and operating cost histories and projections.
A Tenant Eyes Base Years, Base Amounts and Expense Stops
It has become common for commercial tenants to pay the operating or CAM (common area maintenance) costs of the buildings or complexes which they occupy. After such costs are determined, they are generally divided among tenants using their respective pro-rata shares based upon square footage. Commercial tenants know this—they also know how much operating and CAM expenses cost in the 1990's. Such costs can range between $3 and $17 per square foot per year, and are increasing as a percentage of the overall rent bill for the tenant.
The amount of operating and CAM costs paid every year by tenants gives them some incentive to review the mechanics of how pass throughs work. For example, while there are several methods the office or retail landlord can use to calculate total operating or CAM costs for the tenant under the lease, the particular method used can have a dramatic financial impact on the amount of operating or CAM costs paid by the tenant. These methods include:
The Base Year Method
Landlords have made widespread use of the base year method. This approach makes the tenant responsible for its pro-rata share of operating costs which exceed those expended or incurred by the landlord during a "base year." A number of issues affect the actual amount of operating or CAM costs that will be passed through to the tenant when the landlord uses a base year method. For example: