This post originally appeared on tBL member Allen C. Buchanan's blog Location Advice and is republished with permission. Find out how to syndicate your content with theBrokerList.
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This time of year, landlords all over Southern California, present their tenants with a Christmas gift – a bill for operating expenses. Merry Christmas indeed! Also referred to as Common Area Maintenance Charges – CAMs – these lumps of coal disguised as presents – anticipate the cost to operate your location.
So what’s included? Contained within the invoice is an estimate of property taxes, insurance for the structure, and various maintenance line items – such as roof, landscape, air conditioning and so on. Typically, these estimates take into account what’s known and what’s anticipated for next year.
Property taxes. Specifically, property taxes will be known – sort of. Owners receive their property tax bill in October for the last six months of the current year plus the first six months of next year. Yep. You got it. If you receive a bill now for expected charges next year – the last six months of next year are unknown. Confusing? Yes. Since County fiscal years run differently than calendar years – most landlords simply figure a small pop will occur and invoice accordingly. However, if your building sells or if The California Schools and Local Community Funding Act should pass – prepare for a large increase!
Property insurance. Insurance on the structure tends to be fairly easy. Policies are written annually. If the owner of your building and his insurance broker are in synch – not the Boy Band, BTW – these renewals can occur in December – allowing for the owner to allocate accurately.
Maintenance. Other expenses – such as mowing the grass and clearing leaves from your roof – can be predicted through yearly renewable maintenance contracts.
But what’s not included? If your owner hires someone to collect the rents and pay the mortgage – AKA a property manager – most likely this isn’t included in your CAM. Bank charges, depreciation, legal and accounting bills, and debt service are not generally your responsibility.
Major improvements – such as resurfacing the parking lot, changing the storefronts, installing drought tolerant landscape, employing solar panels, or replacing the roof – are afforded special treatment in your lease. Known as capital expenses – significant dollar expenditures – they are normally billed back over a number of years vs a lump sum transfer to a tenant.
Do I pay these? Yes! Companies who rent their business home are bound by lease agreements – unless your landlord has allowed the contract to lapse – at which point a month-to-month relationship exists. Regardless of the term remaining – lease contracts are generally one of two persuasions – a Net or Gross lease. And you pay operating expenses with BOTH.
With a Net – or sometimes called a NNN or Triple Net lease – you commonly pay as you go. Base rent is paid monthly and operating expenses are paid separately as they occur. In other words – property taxes twice a year, insurance once a year, and other maintenance as it happens. Remember – roof, HVAC, and trimming the bushes are all your responsibility – in addition to your rent. Some owners figure it’s easier to simply calculate what their occupants will pay and divide the number by twelve vs relying upon the tenant to pay when due.
With a Gross – or sometimes called a Modified or Full Service Gross lease – your expenses are baked into your base rent. A word of caution here. Some believe a Gross lease limits increases in monthly payments. After all – a base rent bump is specified. But, most Gross leases allow an owner to recapture an increase over your first year’s expense – known as a base year. A double whammy!
Can I dispute the charges? Of course! Typically you have a right to audit the invoice – even requesting specific calculations and back up documentation. Plus, if an owner over or under estimates – there is a reconciliation the following year.
It’s been my honor, dear readers, to converse with you weekly – not weakly hopefully – this year! My best wishes to you and yours for a magical holiday season! Merry Christmas, Happy Hanukkah, and Joyous Kwanzaa to you all and to all a good night!
Allen C. Buchanan, SIOR,
is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected]
or 714.564.7104. His website is allencbuchanan.com