Commercial Lease 101: How to Avoid Hidden Expenses in a Commercial Lease Agreement

Common area maintenance is a set of expenses (landscaping, parking lot, lighting, electricity, insurance, property taxes and so on) that the Landlord anticipates to keep the common areas (the areas shared by all tenants) in good condition.

These expenses are usually incurred by the Landlord as a sort of service in favor of the tenants. In fact, if the property were vacant there would be no reason for the landlord to guarantee any service on it. That is why property owners usually ask Tenants to pay back for these expenses.

Usually the Landlord assesses CAM expenses on a monthly, quarterly, or yearly basis, it really depends by what the lease states, in the section related to CAM, also called Operating Expense section.

Let me clarify the difference between CAM actual and CAM estimates. In fact, those are not the same thing. CAM estimates are monthly estimates, billed to the tenant each month. CAM actual instead, are expenses incurred by the property owner each year.

At the end of the year, the Landlord will compare the actual expenses with the estimates. If the estimates paid by the tenant are higher than the CAM actual, then the Landlord will issue a refund to the tenant. In the opposite scenario, if the actual expenses are higher than the estimates, the Landlord will issue an invoice to the Tenant, which will pay within 30, 60, or usually 90 days, depending on what the lease states.

The amount to reimburse will be assessed according to the tenant’s pro-rata share (Sq. Footage of premise over total square footage of commercial area). Usually, this information is reported in the first page of the commercial lease and it is expressed as percentage.

Case Study

For instance, if you rent a premise of 100 sf. on a commercial area of 1,000 sf., your share will be 10% (100/1,000). Therefore, if the Landlord incurred total CAM or operating expenses (different words to mean the same thing) for $1,000 your chargeable amount should be $100.

Assuming that you paid $5 per month of CAM estimates, on a yearly basis it corresponds to $60 ($5*12 months).

In conclusion, you still owe $40 to the Landlord ($100 – $60). The Landlord will issue an invoice that must have the detail of all expenses incurred in that same year for CAM and how your share was computed.

In fact, even though you must pay within 30, 60 or 90 (according to the lease agreement) you still have the right to perform a due diligence of the CAM charged by the Landlord, which must keep the record of it…

The above case study was a simplification. In fact, the way the CAM expenses are computed depends by the kind of lease you signed (Gross or Net and so on) and what the lease states.

To know more about Commercial Lease Agreements check out the following articles:

Introduction To Commercial Lease Agreements | Real Estate Essentials

How to deal with Common Area Maintenance (CAM) – a fast guide for Landlord and Tenant

 

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Gennaro Cuofano

Gennaro Cuofano, International MBA. Creator of The Four-Week MBA Community and Content Marketer/Business Developer at WordLift