Getting On The Same Page When It Comes To Operating Expense (CAM Costs) Reporting

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A lot of trees have been cut down for the paper used to write about operating expenses or common area costs. That’s because when you talk about passing along operating costs, you are talking real money. Yet, aside from deals where the operating expense charge is a fixed (and usually escalating) amount, far less negotiation is had for a nickel or a dime per square foot of operating expenses than is the case with the same nickel or dime of basic rent. Yet, a nickel is a nickel and a dime is a dime [See: John Lee Hooker, Bottle Up & Go], whether called base rent or operating expenses. In sum, like weather, everybody talks about it, but nobody can do anything about it. But, is that really true? In part, “Yes”; in part, “No.” Here’s our attempt to start a discussion – kill more trees.

One pervasive problem is that there is no real definition of what constitutes a legitimate, includable item of chargeable operating expense. Let’s set aside all other operating expense related issues for today, reports, staleness, auditing rights, capital versus non-capital items, administrative fees, and whatever, and look at the core question of how to get the parties on the same page as to what could be “in” and what could be “out.” If we had such a list, then landlords and tenant could argue, for example, as to who will bear the cost of categories 7, 11, and 15.

In all the years we’ve been Ruminating, we’ve never see the equivalent of a “standard” chart of accounts listing all of the categories of expenses that could possibly be characterized as “pass-along-able” operating expenses. As we envision it, within each of those categories would be a further list of the kinds of items that would fall in that category (“subaccounts”). For reporting and tax purposes, it is common for accountants to use charts of account. They allow for comparability with a company and its subsidiaries and from company to company. There might even be some created specifically for items that are to be included within what leases call operating expenses or common area maintenance costs. But, we’ve never, ever seen any lease that included a chart of accounts for operating expenses, and we’ve seen thousands of leases.

None of this is to say that there aren’t such charts or proposed charts. We know that the kinds of expenses that would go into any form of chart for “pass-through-able” operating expenses are already being posted to an accountant’s chart of accounts. But, the accountants have different categories and different objectives. [For now, we’ll ignore the lone wolf property owner doing its own back of the napkin accounting, though there are many lone wolves out there.] What Ruminations is saying is that leases don’t ever include any such listing. [Hold your fire, telling us that you once saw such a thing or that “you” “always” “insist” on such a list being attached to “your” leases for just these purposes. That will prove nothing. Plain and simple, telling Ruminations and its readers about black swans doesn’t bring relief to the commercial real property leasing industry. No one is doing this, even if you are.]

An example of an “account” might be: “Parking Lot Repairs.” It might have subaccounts such as: Striping; Patching (areas of 2% or less); Replacement (areas of more than 2%); and Sweeping. Another account might be for Exterior Lighting, with subaccounts for Electric Charges; Lamps; Service (including re-lamping); Electrical Repairs; Damage Repairs; Painting; and Replacement. We’re not particularly competent to draw up such a chart of accounts, but there are smart and experienced people out there who can.

Ruminations proposes that there be an industry-standard chart of account for operating expense recovery and that leases require that operating expense statements follow such a standard. We also propose that operating expense reports show “this year’s” expenses and those for the last three years as well. Year to year percentage deviations should be shown. If we had our druthers [i.e., our preference, not the beer from Sarasota Springs], we would require that operating expense statements be accompanied by the underlying bills for each account category whose total was more than 5% above that for the same category in the prior year. We might also require copies of bills from any supplier whose bills in any account category exceeded (say) 30% of the account’s total for the year.

Basically, we’d like to see standard reports sent to all tenants. Yes, every tenant would get the same report. Of course, some tenants might have negotiated exclusions (or carve-outs), and those accounts or subaccounts, though appearing in the reports, wouldn’t be included in the individualized calculation for those tenants. Everyone would have the same information. Landlords wouldn’t be preparing a different “base” report for each tenant. The object would be “transparency.”

Lawyers, such as Sir Thomas More [Lord Chancellor to Henry VIII from October 1529 to May 1532], have tried to get something similar done before. Sir More calls it “Utopia.” We don’t think it has to be.

It would be very nice if some trade group such as the International Council of Shopping Centers (ICSC) or the NAIOP (which used to stand for “National Association for Industrial and Office Parks,” but now stands for just plain “NAIOP”), undertook to create a standardized chart of accounts for items of operating expenses. To us, either group’s list would serve both groups’ constituencies and would work for all kinds of rental property. Even the American Bar Association could attempt such a project. All of these groups have the talent (from all sides of the “table”) and the expertise and the experience to get this kind of job done.

But, that won’t make it work!

What would make it work is if a group of major tenants adopt this requirement. Yes, if tenants with bargaining power insisted that their landlords use a standard reporting format, they and their landlords would save money and they and their landlords would all be on the same page (literally). If that were to happen, tenants within the decreasing bargaining-powerful circles would then have the ability to “get in on the action.” Eventually, participants in the commercial real property leasing industry(ies) would stop playing one of those hidden object games. This wouldn’t end all disputes, but it would move the starting line closer to the finish line.

This doesn’t have to be a Utopian concept. It can work. So, if any readers are in a position to influence an industry-leading tenant and think this is the germ of a good idea, why not toss it out there? If large tenants, working through an industry standard-setting group, latch on to this concept or any reasonable variant of this concept, it could happen. If you think this idea is stupid, please be kind. On a personal level, the one thing we’d like to avoid, however, is suffering the same untimely fate as that of the coiner of the term, “Utopia.” Were that to happen, this would be the last edition of Ruminations, and that would be a shame.

[We’re thinking about Ruminating further about the whole operating expenses “kettle of fish.” Please send comments we can use as bait.]

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Comments

  1. floridalegal says:

    As indicated, there are well meaning rational attempts at standardization. Being a 7 generation Floridian and having been involved in retail real estate for over 30 years, I just love the standard line for “snow removal” in shopping center leases in Florida. Believe it our not, I have on at least a dozen occasions had heated discussions with legal counsel for the landlords over my blanket request to remove all references to snow days and snow removal from a lease that is for a property located in Florida. The best was for a ground lease in a center and I represented the grocer who was spending over $4 million to do the improvements. Three rounds of comments over 4 weeks before snow removal was finally taken out of the landlord’s operating expenses.

    While a rational person would think that everyone could get on the same page, if people can not agree that snow removal is or is not applicable to properties in Florida, i suspect there there will always be a need to go line by line with some landlords and their legal counsel.

  2. unfortunately, ICSC or any other organization that makes it living via landlord involvelment is not interested in a ‘standard’ chart as there seems to be a constant effort by landlords to figure out new ways to extract money from tenants beyond actual costs. As teants we have watched the ‘administrative fee’ ratchet up from nothing to 5% to 10% to 15%. We have watched some, not all, landlords add on property mgt fees PLUS the admin fee and then property mgt fees based on rental receipts while the property mgt team is responsible for re-leasing space, evictions, etc. none of which are common area expenses. Worse yet, it is the mom n pop, unsophisticated tenants that get hammered the hardest, those who are taking the biggest risks. Then, to top it all off, the Landlords then transfer the properties amongst themselves driving up the values and demanding

  3. Should a Tenant insist that CAM charges be a “non-profit” item to the Landlord? Is it a misrepresentation to a Tenant when the Landlord presents a bucket of “pass thru” items that in fact result in a profit to Landlord?

  4. Norman B. Krone says:

    Ira- I have been involved in these discussions for more than 47 years and have never found an acceptable solution for all concerned. Experience has given me insight into the fact that in spite of the negotiation time often spent on what is or is not included as a charge, bear in mind that nearly all of such provisions state that three or four broad items may be common area costs ( such as maintenance, management and operation of the Project) the clause goes on to state “including but not limited to”. Anything recited after those words is generally meaningless. I have seen charges to multi-concept retailers that do not charge the same amount per sq. ft. to each of the tenants within the shopping center. A major problem for the retailer is their failure to properly draft the Lease with inconsistent review and follow up of the billings. If the document is based upon a form without the use of a knowledgeable attorney to vet the provisions, we are destined to have this controversy continue for at least another half century.

  5. In my opinion, BOMA has a pretty good standard but landlords don’t seem to use it.

    The main problem as I see it is that landlords want to maximize profits regardless of whether a pass through in operating or NNN expenses are fair or not.

    David Massie
    DJM Commercial: The Tenant Rep
    david@djmcre.com
    805-217-0791
    djmcre.com

  6. Henry Pharr III says:

    I would have to disagree with David. My experience in representing landlords on this issue is that their goal is to maximize recovery of out of pocket costs for services that benefit tenants in shopping centers, office buildings or industrial parks in a fair and equitable manner. This is not to say that there exceptions, but I more often see the opposite side of the coin. Specifically: tenants who try to twist CAM language and exclusions to pay as little as possible. This is especially true of many senior and junior anchor tenants who have a corporate “policy” of not paying for certain basic maintenance costs that benefit themselves and other tenants such as snow/ice removal and striping of parking spaces. In addition, the “capital improvement” defense is often a knee jerk first reaction to the landlord’s request for payment of certain CAM expenses. While their will always be gray areas (HVAC unit replacement, administrative costs for reconciliation reports, and apportionment of common utility services to name a few), I think most landlords want to simply be reimbursed for the costs they expended to properly maintain the common area for the benefit of all tenants.

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