Remember that premises services (utilities/trash) are not common area expenses!
September 7, 2020
It is not uncommon for a lease to require a tenant to pay quite a few different monthly recurring charges (minimum rent, taxes escrows, CAM escrows or fixed CAM, insurance escrows, perhaps a marketing charge, or storage, or signage to name a few) as well as certain charges to be paid or reconciled annually (those same tax, CAM and insurance charges, percentage rent ). Couple those with so many other clauses that need to be administered for each lease, it is not surprising that landlords try to simplify the administration whenever possible.
One of the more common practices across the industry is to bill certain services provided to tenants for their premises as CAM. In an open air shopping center, these services we see billed most often through CAM include trash removal and water and sewer. Your immediate reaction might be that common area trash and water and sewer for landscaping (hopefully you have separate meters for landscaping so sewer is reduced!) are definitely CAM, and, no doubt, they are.
However, suppose you have just one water main coming in to the center and the tenants do not have individual meters (or maybe some heavy users do). A portion of that water is for the common areas, but a material portion is for water and sewer for the individual tenant premises. That later portion – the water used in each tenants’ leasable areas – in a tenant utility, not a common area expense.
Similarly, premises’ trash is not a common area expense. Yes, we absolutely have common area trash, but if our tenants are using dumpsters that we as landlord pay for the service, that usage is premises’ usage. On the mall side of our business, other expenses treated similarly might also include tenant HVAC (as opposed to mall area HVAC) and, in some cases, electricity.
In most leases (there exceptions even within a center), tenant premises utilities and tenant’s own trash removal services are tenant responsibilities. The tenant is required to pay for these services even if the landlord elects to supply the services.
There are a few reasons you should be thinking about this (you can add your own in the comments as well).
- If you are billing tenant services through CAM, but competitive centers are either billing the separately or third parties are providing those services, your CAM rates per square foot and your occupancy cost ratio will appear higher.
- Caps – While the majority of negotiated caps have exceptions from the caps that often include utilities, not all caps have those exceptions, and those exceptions rarely address a service like trash removal or pest control. By billing through CAM, you might be absorbing expenses you don’t have to because of a cap. (Conversely, there is a possibility you may be artificially inflating a cap if these additional services remain flat – but that’s enough for another blog).
- Denominators/Allocable Square Footage – The square footage provided with these tenant premises services is rarely the same as the square footage used for the CAM denominator, so you might be absorbing expenses for areas not provided with the service. Think about something as simple as trash removal. If you have a 100,000 sf center with a 60,000 sf supermarket that provides its own trash, and the tenants pay CAM on the GLA of the center with no excluded area, billing premises trash as CAM could have you eating 60% of the bill.
- This final one came up quite a few times over the last few months from different owners – if you convert to a fixed CAM charge or to a gross lease, the tenants are still required to pay those charges (unless otherwise negotiated) because they are not CAM.
We are all for simplification of lease administration whenever possible. However, we never want to oversimplify if it will affect cash flow and value.