5 Things Franchise Tenants Need to Know About Common Area Maintenance Charges

In our experience as The Lease Coach, we have met many tenants (both franchisees and independent business owners alike) who have questions and/or concerns about Common Area Maintenance charges (otherwise known as CAM costs or Operating Costs). Considering the importance (and potential impact) of these charges, we have devoted a great deal of attention to the matter in our new book, Negotiating Commercial Leases & Renewals For Dummies. Here are just a few things you will need to know:

Classify Common Area: Common area is the area of a building used by all tenants and their customers. Examples of common area include lobbies, corridors and restrooms. Parking facilities, malls, sidewalks, landscaped areas, public toilets and truck and service facilities may be included as common areas when calculating the tenant’s share of building Operating Expenses.

Negotiate the Operating Costs as Rent: You may well hear from most commercial real estate professionals that Operating Costs are not negotiable; there are, however, aspects of Operating Costs that can indeed be changed to the tenant’s favour. The landlord wants to make sure that the tenants pay for all the Operating Costs for the property. There’s nothing unusual about that. But when The Lease Coach analyzes Operating Costs for groups of tenants in a building, we frequently find that the tenants are subsidizing capital improvements that the landlord is using to enhance or increase the building’s value. Negotiating to cap increases to certain costs or excluding certain items from Operating Costs can help keep these in check.

Look at What You’re Paying For: The majority of commercial lease agreements may stipulate the specific components of the Operating Costs that the tenants need to pay for. Typical examples include general maintenance, painting, lawn cutting, snow removal, property insurance and so on. Almost every lease agreement has an Operating Cost clause and typically defines these Common Area Maintenance charges in a short – or long-form manner. From a tenant’s perspective, longer is better because it creates certainty.

Understand why Proportionate Share Counts: If a tenant occupies seven percent of a commercial property, they can typically be required to pay seven percent – their proportionate share – of the Operating Costs as additional rent. But not all tenants used Operating Costs proportionately. For example, who would use more water, a hair salon or a gift store? Have your proportionate share of the CAM costs (as a percentage number) actually stated in the lease agreement. And don’t be afraid to question or dispute the Operating Costs and your proportionate share.

Communicate with Your Landlord about CAM Concerns: Operating cost discrepancies come in two flavors: honest mistakes or dishonest (deliberate, negligent or fraudulent) calculations. In a building where the property is fully or close to fully occupied, the landlord may have less reason to try to profit from Operating Costs but may still try to enhance the property with the tenant’s money. However, when a property has several vacancies, the landlord may want to avoid paying his proportionate share of Operating Costs for the vacant units. Therefore, the landlord may put language into the lease agreement stating that the Operating Costs will be calculated as if the property is 95 – 100% fully leased or occupied, whether it is or not. Communicating with your landlord both verbally and in writing about any Operating Cost concerns you may have is imperative. And don’t wait too long because the lease may stipulate a statute of limitations on adjustments.

For a copy of our free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail your request to DaleWillerton@TheLeaseCoach.com.