This is a transcript of an episode of the LeaseSmart Podcast.
Craig: This week, I wanted to speak about Common Area Maintenance exclusions and limits. I know it may sound boring, but again, this is money in your pocket and something that you need to pay attention to.
It’s very interesting. I thought I was being a hero one time when I was helping out a landlord many years ago. We track expenses by cost-per-foot. In a certain market, insurance might average X dollars per square foot of building space and similarly taxes might run X dollars per square foot, etc. I noticed that his insurance was through the roof. Let’s say that at this time the insurance should have been around $1.50 per square foot and instead, it was like $4 a square foot. I recognized that as not good. I started saying, “Hey, I know this company that can insure this building and they can save you a lot of money.”
I was really shocked that the landlord did not want my help at all. He said “No, no. We’re fine. We’re fine on the insurance.”
I discovered later on that his insurance policy covered a lot more than just a building. It was like a blanket insurance policy, and I don’t know the exact details but I suspect there were other properties and perhaps even automobiles this his insurance covered. All of which he’s passing on the tenants in this building.
C: Yeah I know. Now you might consider yourself an honest person but I’m not sure I would consider that honest. Maybe buried into the lease it says “You know you cover this.” I don’t know, but it was higher than it should be and that kind of stuff happens. That’s the point of my story.
There actually are companies that make their entire income from auditing leases. So, if you have a big space and you’ve been there a while, they will happily, on a contingent basis, examine your lease and your expenses that you’ve been paying over the years. They charge a percentage of what they saved you. So they could come back and say, “We see that over the years you’ve paid $150,000 too much.” Then you can expect a credit from the landlord in the future or maybe check. That drives landlords crazy but fair is fair.
So that’s one thing that happens, but the point would be that you should always read what’s included in the Common Area Maintenance. I just see so many instances of this that would take too long, but I will tell one example that amazed me. One time we were working with an attorney who was representing the tenant. I think they were out of Boston or Baltimore and they took a look at a lease and they came back with about 3 pages of exclusions – things CAM won’t cover. They were detailing all kinds of things that I had never thought of but they were just being very very specific about how much would be allowed in management fees or asset management fees. I’ve actually seen landlords wanting to charge you for depreciation even though this is a non-cost item.
So anyway, the point of the story is that it shouldn’t be boring. Have your experts, including your attorney, look through what the Common Area Maintenance includes and I know that there are bond-type triple net leases where they do in fact cover every single thing and that’s the way it should be. Just know what you’re getting into. If it’s a single tenant net lease building, the landlord or the owner might just say “Every single thing is on top of the rent you are paying me. You pay it. I don’t want to hear about it.” And that is fine. That’s what you are getting into. But, if you are renting some office space and you are having to pay too much of the roof repairs or replacements or to much of the air conditioning or placements, and you’re 5 years into a 6 year lease, and all of a sudden an influx of expenses occur, it is an issue. I’ve seen that happen. You many find it boring. It’s in the boiler plate but if you don’t pay attention to it, it could cost you money that otherwise should go to you not the landlord.
N: Yeah, so would it ultimately mean taking them to court if you hire someone to look into this for you and they find something that isn’t quite fair?
C: It could be. Sometimes it’s an honest accounting mistake and it’s not really a fight. It depends what the lease says. For many leases they will not allow an audit on a contingent basis or they won’t allow you to look into tenant over-payment issues back more than X number of years.
Those are are negotiable items that you might want to pull out of the lease or maybe you are going to live with it, but it’s just something that you pay attention to. It can be buried and it can be lengthy and we almost always make some changes to what should be excluded from Common Area Maintenance.
There’s also controllable and non-controllable expenses like a triple net lease, is net of taxes, net of insurance and net of Common Area Maintenance you know property maintenance. It’s a catching all term.
The non-controllable expenses would be considered taxes and insurance. You’re going to pay your pro rata share of any increases in those but there are also controllable expenses that are considered which should be your lawn maintenance and lot maintenance, etc. where you may get an agreement from the landlord that those cannot go up more than 3% a year for example.
There’s a lot that can be done on that. It might not be the biggest issue in the world but on the other hand it might save a few thousand dollars here and there, too.
N: Oh yeah for sure! CAM charges can add up.