June 3, 2018
We were working on a property this week that had a newer 20,000 sf fitness center on a gross lease at an incredibly low rate per square foot. It wasn’t the rate per square foot that bothered me – it was at the back of the center not fronting on the main parking lot. It might have otherwise been non-leasable area. It wasn’t the fact that it was a gross deal with no CAM, tax or insurance contributions.
Two things bothered me. The first was that there were quite a few tenants at the center with leases requiring them to pay based upon the leased area, not the leasable area. Therefore, because the space was leased rather than vacant, the landlord truly was absorbing the CAM, tax and insurance on this 20,000 sf space (whereas, if it were vacant, other tenants would be picking up a portion of the charges).
But, the second, more troubling issue, was that the tenant’s lease read that the tenant would “operate a minimum of 12 hours per day.” Not a big deal – but the tenant is operating 24 hours per day. AND THERE IS NO PROVISION FOR THE BILLING OF AFTER HOURS EXPENSES TO THE TENANT.
Therefore, the tenant not only is not paying any CAM charges at all, they are causing an increase to all other tenants’ CAM. Granted, the right thing to do would be to keep after hours expenses separate from CAM and bill those only to those tenants operating after hours. But, since there are no true set operating hours in this lease (or, more importantly, in most of the other leases), there are not “after hours” expenses based upon a literal application of the lease terms.
Make sure you consider the impact of a gross lease on other tenant!