San Diego Commercial Leases: What is CAM?
“CAM” stands for common area maintenance with respect to rent-like charges that are usually contained in commercial and retail leases. As we recently discussed, most commercial and retail leases are “triple net leases.” The lease is “triple” in that the tenant pays rent, the tenant’s share of taxes and insurance, and the tenant’s share of the building or shopping center’s common area maintenance expenses like lawn care, waste removal, etc. Issues with respect to CAM can be quite contentious when your San Diego business is negotiating a lease. Here is how your trusted and experienced business attorney can help.
Negotiating San Diego Commercial Leases: Renegotiating Definitions: “Proportionate Share”
The first tactic that your negotiation-tested business lawyer can use to help reduce CAM costs is to try and re-define the various definitions.
For example, with respect to CAM, there are four important numbers:
- Total square feet you are renting — let’s say 1000 sq. feet
- Total square feet of the ENTIRE space in the building or shopping center including parking lots and common areas — let’s say 12,000 sq. ft.
- Total square feet of LEASEABLE space — actual usable building space; let’s say 10,000 sq. ft.
- Total square feet of actually LEASED space — what is actually being leased; let’s say 5,000 sq. ft.
Landlords can be sneaky when defining the “tenant’s proportionate share” of CAM. Your accomplished business attorney is going to pay close attention to how these four items are defined in the lease and how they are calculated to determine your costs with respect to CAM. Running the numbers, you want your “proportionate share” to be based on the ENTIRE space. That equals 8.3333% in our example. The next best negotiation result is to have your proportionate share based on LEASEABLE space which is 10% (1,000 sq. feet is 10% of 10,000 sq. feet). The worst outcome is to have your proportionate share based on the actually LEASED space which results in a 20% share. What happens is you end up paying the CAM for empty rentable space within the building/shopping center.
Aside from the higher CAM, the LEASED space version is also less favorable because it is year-to-year variable which leads to uncertainty and to potential cycles of decline. When the building/retail space is doing well, your share of CAM is reasonable. But, if an anchor tenant exits, then the CAM goes up which can have the effect of torpedoing tenants who are just barely making it. The extra CAM for those tenants can cause them to go bankrupt, leading to more empty rentable space which in turn leads to more tenant exiting, which causes a bad cycle of decline. Further, with the tenants paying more CAM if leasable space is vacant, the landlord has less incentive to aggressively seek leaseholders.
If the landlord insists on basing the proportionate share on LEASED space, your nimble business lawyer still has a few negotiation strategies such as seeking a minimum level below which the LEASED space cannot fall — say 90% — or maybe excluding certain large anchor tenants and more.
Negotiating San Diego Commercial Leases: Renegotiating Definitions of “Common Area”
Another definition that can be negotiated is “common areas.” As the name would imply, “common areas” are areas around the building or the retail shopping area that are shared commonly by all the tenants. These would include hallways, sidewalks, parking lots, atriums, and other areas not rented to any given tenant (or held back for use by the landlord). Even though something might be “reserved” for use by certain tenants (such as certain parking spots or areas), in general, such are still typically considered “common areas.”
Here again, landlords are often sneaky with how “common areas” are defined. Many landlords try and include the management or leasing office as part of the “common areas.” Likewise, storage and garage space are often included even though the tenants and their customers have no access or use of these “common areas.” In addition, some tenants might have exclusive use of some part of the sidewalk, atrium or parking lot, but such are still included within the definition of “common areas.”
Your adept business lawyer will work to redefine what is considered “common areas” in order to reduce your monthly CAM costs.
Negotiating San Diego Commercial Leases: Renegotiating Definitions of “Maintenance Expenses”
In addition, your business lawyer will work to eliminate certain expenses from your CAM costs. For example, if you have your own waste management service, occasionally, landlords will agree to remove that expense from the CAM for your lease. As another example, many leases include as part of the CAM an administrative fee and often additional management fees. Each fee often goes to the leasing/management office and is, frankly, a form of double-dipping by the landlord. Your lawyer will insist that the landlord choose one or the other.
Negotiating San Diego Commercial Leases: “Capital Improvements” Need Special Attention
Finally, your ace business lawyer will give special attention if the lease includes “capital improvements” in the CAM. Capital improvements are costs related to changes/improvements to the common areas that go beyond normal repair and maintenance. The issue here is making sure the costs are spread out over the life of the improvement (15 to 30 years) to avoid having current tenants pay for improvements that will benefit the landlord long into the future.
California Business Law: Contact San Diego Corporate Law
If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has many years of experience helping San Diego and California businesses and can help with any lease negotiations. Mr. Leonard can be reached at (858) 483-9200 or via email.