CAM Costs (from The Complete Guide to Shopping Center Management, 5/e)

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Eliminate Audits, Administrative Burdens by Switching to Fixed CAM Payments. One of the biggest sources of tension between owners and tenants is CAM costs. The CAM cost clause is one of the most heavily negotiated clauses in a retail lease. To help prevent problems, many centers are switching to fixed CAM payments. Read more.

CAM Costs (from The Complete Guide to Shopping Center Management, 5/e)

  1. 1. The following chapter comes from the latest edition of: The Complete Guide to Shopping Center Management, Fifth Edition, published by Vendome Real Estate Media. For more information on this book and other related resources, go to: www.VendomeRealEstateMedia.com Chapter 9 CAM Costs Eliminate Audits, Administrative Burdens by Switching to Fixed CAM Payments O How to Switch to Fixed CAM Payments ne of the biggest sources of tension between owners and tenants is CAM costs. The CAM cost clause is one of the most heavily negotiated clauses in a retail lease. Even after the lease is signed, owners and tenants still often disagree about which costs should be included in CAM costs and passed along to the center’s tenants, resulting in costly and time-consuming CAM cost audits. And disputes also arise at the end of the year when tenants’ payments are reconciled with the center’s actual CAM costs. If you decide to switch to a fixed CAM payment system, you’ll have to amend your tenants’ leases to reflect this change, notes Groarke. Owners often switch to such a system when expanding the center or making major renovations, since they usually need to amend tenants’ leases in other ways at such times, he explains. But there’s no reason you have to wait until then. To switch to fixed CAM payments, you’ll first need to determine what the tenant’s fixed CAM cost payment will be, explains Groarke. To do so, estimate what the tenant’s CAM payments would be under the current pro rata share system. The best way to do this is to consider two types of information: To help prevent these and other problems, many centers are switching to fixed CAM payments. Under such a payment system, tenants agree to pay a flat, predetermined amount each month toward the center’s CAM costs. Since the CAM payments are fixed, there’s no need for an end-of-the-year reconciliation of tenants’ estimated CAM payments and the center’s actual CAM costs to determine whether the tenants under- or overpaid their share of CAM costs. By eliminating the estimated payments and end-of-the-year reconciliations, the audits that can result from them are also eliminated. Historical. Look at what the tenant’s past CAM cost payments have been, says Groarke. Consider at least the past two to three years of CAM cost payments, if possible. And look out for any aberrations on the high or low side, says Groarke. For example, if one year there was more snow than usual, the tenant’s share of the center’s snow removal costs for that year would be atypical, he explains. In such a case, do not consider the tenant’s payments for that year; go back to another, more typical year, he advises. With help from New York attorney Kevin P. Groarke, we’ll explain how to switch to fixed CAM payments and how doing so can benefit both you and your tenants. And we’ll give you a Model Amendment that you can add to your leases if you decide to switch to fixed CAM payments. Prospective. Also consider what your center’s CAM costs are likely to be in the future, notes Groarke. Since you won’t be reconciling the ten- 175
  2. 2. 9: CAM COSTS ant’s payments with your actual costs, you do not want to set a tenant’s fixed CAM payments too low, he warns. If you do, you’ll have to eat the difference between those payments and your actual CAM costs, he explains. So look at industry forecasts to find out how much, say, heating and electricity costs are expected to increase over the tenant’s lease term, he suggests. And ask your insurance agent how much your insurance costs are expected to increase over that time period, he adds. Once you come up with a figure based on these considerations, you should then increase this figure by a contingency factor to protect you in case you underestimated your center’s CAM costs or unforeseen circumstances increase your center’s costs, advises Groarke. This final figure will then be the tenant’s fixed monthly CAM payment, which is separate from the tenant’s monthly minimum rent, he explains. (For an alternative method of structuring fixed CAM payments, see the box on the following page.) Since the tenant’s fixed CAM payments are not reconciled at the end of the year with the center’s actual costs, the tenant never gets a refund of an overpayment—or a bill for an underpayment, he adds. You should also provide for regular increases in the tenant’s fixed CAM payments, suggests Alternative Method of Structuring Fixed CAM Payments Most owners that switch to fixed CAM payments use the method described in the main article to structure tenants’ CAM payments, notes New York attorney Kevin P. Groarke. But there’s another method that can be used, called modified grossed-up rent. This method is similar to how many office building tenants pay for their electricity—their electricity is included in their rent, he explains. With the modified grossed-up rent method, a tenant’s monthly minimum rent includes a fixed amount that goes toward the center’s CAM costs. So instead of paying its CAM payment separately from its rent, the tenant makes one payment that includes both its minimum rent and its fixed CAM payment, says Groarke. If you decide to use the modified grossed-up rent method, you’ll need to amend the minimum rent section of the tenant’s lease to reflect the inclusion of the fixed CAM payment in the minimum rent payment, says Groarke. And if the tenant has an extension or renewal option, make sure you amend that section of the lease to reflect the inclusion of the fixed CAM payment in the minimum rent the tenant will pay during each option period, he adds. 176 Groarke. You can base this increase on either a fixed rate—say, 3 percent each year—or the Consumer Price Index, so that such payments keep up with inflation, he says. Benefits of Fixed CAM Payments Switching to fixed CAM payments benefits both you and your tenants, says Groarke. Here’s how: ■ Creates certainty as to the amount to be paid by your tenants toward the center’s CAM costs; ■ Eliminates CAM cost audits, which are an expense and a burden for everyone; ■ Simplifies lease negotiations because the parties do not need to agree on what items are included in and excluded from CAM costs; ■ Reduces the administrative burden created by the traditional payment of CAM costs, particularly for you; and ■ Eliminates a major source of tension between you and your tenants. In addition, switching to fixed CAM payments frees up your staff to deal with other issues, adds Groarke. And it allows you to make a profit if you can reduce your CAM costs below what you’re collecting from your tenants, he notes. Amend Leases to Make Switch As mentioned above, if you decide to switch to fixed CAM payments, you’ll have to amend your tenants’ leases to reflect this change, notes Groarke. In his experience, few tenants have objected to such a switch. Most tenants are willing to trade off the uncertainty of their current estimated CAM cost payments by making a fixed CAM payment that’s likely to be slightly higher than what they’re estimated payments have been, he explains. Your amendment, like our Model Amendment, should do the following: Say sections that refer to pro rata share of CAM costs are now deleted. Say that all the sections in the lease that refer to the tenant’s pro rata share of the center’s CAM costs are hereby deleted, says Groarke. Since the tenant’s CAM payment is no longer based on its pro rata share of the center’s CAM costs, these sections are no longer necessary, he explains [Amend., par. 1]. Spell out tenant’s fixed CAM payment during lease term. Require the tenant to make a fixed CAM payment over the remainder of its lease term and say COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT
  3. 3. 9: CAM COSTS Model Amendment: Spell Out Tenants’ Responsibilities Under Fixed CAM Pay Here’s a Model Amendment, written with help from New York attorney Kevin P. Groarke, which you can add to tenants’ leases if you decide to switch to fixed CAM payments. Show this amendment to your attorney before adapting it for your use at your center. FIXED CAM PAYMENTS THIS AMENDMENT TO LEASE is made as of [insert date], between [insert owner’s name] (“Landlord”) and [insert tenant’s name] (“Tenant”). Landlord and Tenant entered into a Lease Agreement dated [insert date of lease] (the “Lease”) with respect to premises identified as [insert name of premises] (the “Premises”). In return for valuable consideration exchanged between Landlord and Tenant, Landlord and Tenant agree as follows: 1. Deletion of pro rata share sections. The following provisions of the Lease are hereby deleted in their entirety and without substitution: [insert #s and titles of appropriate sections, e.g., Section 5 captioned “Tenant’s Share of Estimated CAM Costs”]. 2. Payment of Fixed CAM Charge. The Lease is hereby amended by adding the following as a new Section [insert # and title of new section, e.g., Section 10 captioned “Tenant’s Fixed CAM Charge”]. Effective as of the signing of this Amendment, Tenant shall pay in equal monthly installments, due on the first day of each month, the Fixed CAM Charge as follows: DATES ANNUAL FIXED CAM CHARGE MONTHLY CAM PAYMENT [insert dates, e.g., Jan. 1, 2012 through Dec. 31, 2012] [insert annual fixed CAM charge, e.g., $12,000] [insert monthly CAM payment, e.g., $1,000] [insert dates, e.g., Jan. 1, 2013 through Dec. 31, 2013] [insert annual fixed CAM charge, e.g., $12,360] [insert monthly CAM payment, e.g., $1,030]] [insert dates, e.g., Jan. 1, 2014 through Dec. 31, 2014] [insert annual fixed CAM charge, e.g., $12,730] [insert monthly CAM payment, e.g., $1,061] 3. Payment of Fixed CAM Charge during renewal periods. Should Tenant exercise its rights under Section [insert # of sec- tion covering renewal or extension option] and renew the Lease, Tenant shall pay in equal monthly installments, due on the first day of each month, the Fixed CAM Charge as follows during said renewal period: DATES ANNUAL FIXED CAM CHARGE MONTHLY CAM PAYMENT [insert dates, e.g., Jan. 1, 2015 through Dec. 31, 2015] [insert annual fixed CAM charge, e.g., $13,112] [insert monthly CAM payment, e.g., $1,093] [insert dates, e.g., Jan. 1, 2016 through Dec. 31, 2016] [insert annual fixed CAM charge, e.g., $13,505] [insert monthly CAM payment, e.g., $1,125]] [insert dates, e.g., Jan. 1, 2017 through Dec. 31, 2017] [insert annual fixed CAM charge, e.g., $13,910] [insert monthly CAM payment, e.g., $1,160] 4. Waiver of audit rights. Tenant hereby waives for Tenant and for all those claiming under Tenant any rights (whether under this Lease, at law, in equity, or otherwise) to audit costs and expenditures relating to or arising from Landlord’s obligations under Section [insert # of section covering repair and maintenance] and Section [insert # of section covering common area maintenance]. 5. Reaffirmation of lease. Except as expressly provided herein, the terms and conditions of the Lease are hereby expressly reaffirmed in each and every respect. Landlord’s signature________________________________________________________________________________ Date_ ______________________ Tenant’s signature__________________________________________________________________________________ Date_ ______________________ COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT 177
  4. 4. 9: CAM COSTS what that payment will be, both annually and monthly, says Groarke. Also, spell out the increases in the fixed CAM payment over the remainder of the lease term, he adds [Amend., par. 2]. Spell out tenant’s fixed CAM payment during renewal periods. If the tenant has a renewal option, spell out what the tenant’s fixed CAM payments and increases of such payments will be during the renewal periods, should the tenant exercise its renewal option, says Groarke [Amend., par. 3]. Require tenant to waive audit rights. Since there’s no end-of-the-year reconciliation of the tenant’s fixed CAM payments and the center’s actual CAM 178 costs to determine whether there was an under- or overpayment, there’s no need for the tenant to audit your center’s actual CAM costs, Groarke notes. So require the tenant to waive its right to audit your costs and expenditures relating to repairs and general maintenance of the center’s common areas [Amend., par. 4]. Reaffirm rest of lease. Make sure you say that, except as expressly provided in the amendment, the lease’s other terms and conditions stay the same, advises Groarke. This will help avoid any confusion over which lease terms are still in effect and which have been changed [Amend., par. 5]. COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT
  5. 5. 9: CAM COSTS How to Persuade Reluctant Prospects to Accept Fixed CAM D espite the benefits that a fixed CAM cost system offers, many prospective tenants are reluctant to agree to it. They have concerns over the calculation of the fixed CAM costs, as well as what may happen during the life of the lease. Here’s a rundown on four common tenant concerns and the arguments you can use in response to overcome those concerns: #1: Without Audit, Tenant Cannot Negotiate Reasonable Fixed CAM A tenant may not want to sign a fixed CAM lease until you let it audit your books and records. It may claim that it can negotiate a reasonable fixed CAM payment with reasonable increases only after it verifies your center’s actual CAM costs. Your response. Explain to the tenant that the only issue that matters in evaluating the fixed CAM amount is whether the overall economics of the deal work for the tenant. If the fixed CAM number works within the context of the entire financial deal, then knowing the previous actual CAM costs, down to the penny, is irrelevant for the tenant. Therefore, an audit isn’t necessary. #2: Fixed CAM Leads to Deterioration of Services A tenant may worry that a fixed CAM cost system could lead to a deterioration of CAM services— such as maintenance and repairs. The tenant may reason that if your reimbursement is fixed and your costs rise, you’ve got no incentive to properly maintain the center. Your response. Tell the tenant that you have no desire, nor would it be smart from a business perspective, to let your center deteriorate. Also point out if, as is usually the case, you’re using your center as collateral for a mortgage loan, it’s likely that the loan documents will require you to be in compliance with laws and/or maintain the center or risk being in default. And remind the tenant that because of the competitive nature of the retail marketplace, you have to keep your center in excellent condition and run it efficiently to attract and hang on to desirable tenants. You can also offer to include lease language to allay the tenant’s fears. In such language, you would promise to maintain the center’s common areas in a manner consistent with first class shopping centers of a similar size and nature. #3: Exclusions Undermine Fixed CAM A tenant may worry that you’ll try to exclude certain “uncontrollable” costs from the fixed CAM cost system—such as snow removal costs, insurance costs, utility costs, and “extraordinary expenses.” You may plan to charge those costs to the tenant over and above its fixed CAM payment to avoid getting burned if the costs spike. But the tenant will argue that once you start making these exclusions, the fixed CAM cost system begins to look like prorata CAM and the tenant will no longer have certainty about its costs. Your response. One possible response is to agree not to exclude uncontrollable costs from fixed CAM. Alternatively, if you want to exclude those costs but the tenant objects, you could agree to set a cap on the excluded uncontrollable costs, so that the tenant isn’t taking such a big financial risk. #4: Escalator Results in Excessive CAM Increase An annual fixed CAM payment will increase each year by a set rate—known as an “escalator.” A prospective tenant may express concern that a set annual escalator like this will hit it too hard financially. It may point out that while the percentage may seem small, it would become unfairly high over time, as it compounds annually. EXAMPLE: The first year of fixed CAM is $20 per square foot. Fixed CAM is increased by a 5 percent compounded increase over 10 years. In the 10th year, the tenant will pay fixed CAM of over $31 per square foot—that’s an increase of 55 percent over the 10-year lease. The tenant will argue that percentage should be lower or tied to the Consumer Price Index. Your response. Here too, point out to the tenant that its bottom line should be whether the fixed CAM economics make sense for it in terms of the entire deal. Remind the tenant that you’re assuming all of the risk if actual CAM costs spike above the escalator percentage, which they may do even with the compounded increases. For instance, there’s no assurance that under a pro-rata system, the tenant in the example above would be paying less than $31 per square foot in the 10th year, he says. It could be paying more. Plus, even with compounded increases, the tenant has certainty about its fixed CAM payments. COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT 179
  6. 6. 9: CAM COSTS How to Avoid CAM Charge Disputes During Renovations or Expansions Y ou never want to deal with CAM audits and late CAM payments from disgruntled tenants who question the numbers. When you and your tenants fight over CAM charges, it’s a lose-lose situation. That’s why, for the most part, CAM charges are carefully calculated and separated from other internal expenses. But during center renovations or expansions, even the most conscientious owners and managers can have difficulty separating CAM expenses from other expenses. It’s rarely black and white. For example, tenants may claim that a center’s new expansion required the hiring of additional security guards, produced extra garbage and dust, and increased utility costs. But additional security may be unrelated to the renovations; you may have hired additional security because of recent crime in the area. Also, it’s difficult to calculate the amount of time spent cleaning dust and debris that entered the center’s common areas because of the renovations. To help avoid CAM charge disputes during a renovation or expansion, set fixed CAM charges for each tenant, to be in effect during the period of the renovation or expansion, before it begins, recommends commercial property expert Linda Schear. That way, tenants cannot complain about overpaying CAM charges during that period and you can focus on renovating or expanding your center. You can set the fixed CAM charge with a letter agreement or a lease amendment. We’ve provided you with a Model Lease Amendment that you can adapt and use. When to Approach Tenant Approach tenants before the renovation or expansion begins to offer them a fixed CAM charge during the renovation or expansion period. It’s likely you’ll meet with them beforehand, anyway, to discuss center promotion, blocked signage and access issues, relocation options, and any expected parking problems during the renovation or expansion. So take this opportunity to explain the benefits of fixing CAM charges to avoid future disputes, says Schear. Tenants typically favor fixed CAM charges in these circumstances, she says. That’s because fixed 180 CAM charges mean predictable expenses for that period. How to Set Fixed CAM Charges You can set fixed CAM charges by letter agreement or by a more formal lease amendment. How you do it depends on your circumstances. If you have no other issues to negotiate with a tenant, a letter agreement is easier, says Schear. But often, during renovations, you’ll have to offer rent concessions or allow tenants to exercise their relocation rights because construction may block tenants’ lines of sight or access, she adds. If you need to negotiate such issues with tenants, it’s better to use a lease amendment covering both the fixed CAM and the other issues. ✦ PRACTICAL POINTER: Although you might think you’re at risk of losing money by fixing CAM charges, more reliable CAM charge collections should offset potential losses, says Schear. And fixing CAM charges may help reduce disputes with tenants, making them more likely to be cooperative during other renovation negotiations (say, access and visibility issues), she adds. What to Say in Agreement or Lease Amendment Your agreement or lease amendment, like our Model Lease Amendment, should cover the following issues: Amount of fixed CAM charge. Schear suggests fixing CAM charges at a level slightly above what they were in the prior year. You could increase it by the Consumer Price Index or by a fixed percentage— say, 5 percent, she says. ✦ PRACTICAL POINTER: Depending on your location, you may have some unpredictable costs that could vary greatly during the period that you’re charging a fixed CAM charge. These costs could include snow removal costs, property taxes, and utility bills. You can choose to have the fixed CAM charge not cover these costs—in other words, in addition to the fixed CAM charge, the tenant would have to pay its share of those unpredictable costs, as calculated under the lease’s common area maintenance charge clause. COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT
  7. 7. 9: CAM COSTS Duration of fixed charge. You also need to decide how long the fixed CAM charge period will last. Schear suggests fixing CAM for either a set accounting period, such as one year, or for the period of the renovation, as defined by the center. You might define the renovation period as beginning on a particular date and ending with the center’s “Grand Reopening,” a specific date you set in the future. It’s also smart to state in any agreement or amendment that after the renovation period ends, CAM charges will again be calculated according to the method described in the lease, Schear says. That prevents any misunderstanding over what the tenant will pay when the renovation or expansion is completed. Model Amendment: Set Fixed CAM Charges During Renovations or Expansions Here’s a Model Lease Amendment you can adapt to confirm an agreement to set fixed CAM charges during a renovation or expansion of your center. Talk with your attorney about adapting it for your situation. FIXED CAM CHARGES THIS AMENDMENT TO LEASE is made as of [insert date], by [insert name and address of owner] (“Landlord”) and [insert name and address of tenant] (“Tenant”). RECITALS: Landlord and Tenant have entered into a Lease dated [insert date lease signed] (the “Lease”) with respect to [insert location of space] (the “Premises”) located at [insert name of center] (the “Center”). Landlord desires to fix the common area maintenance charges (“Common Area Maintenance Charges”) of Tenant for the period beginning on [insert start date of renovation period] for a period of one year. 1. Under Section 3.5 of the Lease (the “Common Area Maintenance Charge Clause”), the Landlord’s permissible Common Area Maintenance expenses are defined and the Tenant is obligated to pay as Common Area Maintenance Charges its representative share of said Common Area Maintenance Expenses. 2. The Owner and Tenant have agreed to modify the Common Area Maintenance Charge Clause for a limited purpose and amend the Lease to reflect this modification. 3. Tenant acknowledges that for the period commencing [insert date active work on the renovation commences] through [insert date one year later] (the “Fixed CAM Period”), the Common Area Maintenance Charges paid by Tenant shall be fixed at $[insert amount] per year, paid in monthly installments of $[insert amount], and notwithstanding the provisions of the Lease or any actual increase in the Landlord’s costs of maintaining and operating the Common Areas, shall not be increased during the Fixed CAM Period. 4. After the Fixed CAM Period expires, the Tenant’s obligations to pay Common Area Charges shall be governed by the Common Area Maintenance Charge Clause. 5. Other than the modification listed in Paragraph 3 hereof, the lease shall remain in full force and effect. 6. This Lease Amendment shall become a part of the Lease and shall be binding on all future assignees and subtenants. Landlord’s signature__________________________________________________________________________________________ Tenant’s signature____________________________________________________________________________________________ COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT 181
  8. 8. 9: CAM COSTS Tell Tenants When You Are Deducting CAM Costs I n today’s economy, you may decide not to pass through to your tenants all the CAM costs to which you’re en­itled, says Keturah Bay, senior t manager at Deloitte & Touche. That’s be­ ause you c may want to attract tenants and stay competitive by keeping CAM cost payments low and comparative to other centers, she explains. But if you deduct certain costs from your tenants’ shares of CAM costs and then later try to pass those costs on to your tenants, they may balk at paying them, she warns. Why Tell Tenants About Deducted Costs? You may think that you do not need to tell your tenants that you’re deducting certain CAM costs from their shares of CAM costs, says Bay. But if you do not tell them now, you may face the following problems if you later try to pass these costs on to your tenants, she cautions: ■ Tenants may refuse to pay the costs; ■ Tenants may demand CAM audits; and ■ If a tenant audits you and discovers an overcharge, it may be difficult for you to offset that overcharge by the amount of the previously deducted CAM costs. What to Say on Reconciliation Statements If you decide to deduct certain costs from the tenants’ share of CAM costs, make sure this deduction is clearly disclosed in each tenant’s CAM cost reconciliation statement, advises Bay. By disclos- 182 ing this deduction, you may avoid the above-mentioned problems. Your reconciliation statements should say two things: Type of deduction. For a general deduction, add a line item saying something like “Landlord’s Goodwill Credit: [$500].” And deduct this amount from the total amount due, she says. Or if you decide to deduct a specific charge—say, the increase in the charge for the center’s water—spell out exactly what charges are being deducted, she suggests. No obligation to make future deductions. Whatever type of deduction you give, it’s critical that you explain in the reconciliation statement that you’re not obligated to make any similar deductions in the future. And say that if the tenant audits you and discovers an overcharge, you reserve the right to offset any overcharge by the amount of the previously deducted CAM cost. Bay suggests adding the following language to your reconciliation statements: MODEL LANGUAGE The above-noted [insert either “Landlord Goodwill Credit” or specific charge being deducted, e.g., increased water charge deduction] to the [insert year] calendar year CAM Costs in no way obligates the Landlord to continue to issue a similar credit in future years. If there is any claim by Tenant pursuant to an audit for past or future CAM Costs, the Landlord may elect to offset any such claim by the amount of the [insert either “Landlord Goodwill Credit” or specific charge being deducted, e.g., increased water charge deduction] given above now or in the future. COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT
  9. 9. 9: CAM COSTS Provide Accurate, Defensible Water Usage Bills with Submetering B ecause of the slow economic recovery, commercial property managers have been under more pressure than ever from struggling tenants to lower CAM costs. And tenants that may not have questioned their CAM costs in the past are asking to see detailed bills—including water charges, which can be costly—to ensure they are not being overcharged. These requests may strain property managers who are busy with other time-consuming responsibilities. To simplify the process, you can provide tenants with a record of the exact amount of water they have consumed and accurate charges based on their consumption by submetering your property’s main water meter using wireless technology. And submetering also can cut out the time that you spend on monitoring the main water meter to split the total monthly charges into individual water bills for each tenant. Benefits of Submetering Submetering the main water meter at a shopping center alleviates pressure on property managers to keep the CAM costs that they are responsible for charging individualized and lower than in the past. A wireless submetering system is especially useful for larger properties because it collects water usage data for each tenant and calculates the tenant’s charges based upon how much water only that tenant uses. Submetering can be performed by wireless technology companies that partner directly with owners after submeters corresponding to each tenant’s space have been installed. Wireless submetering systems provide water consumption data to third-party billing companies that administer meter readings and provide a fee report that property managers can use to bill tenants. Because an independent billing company collects the data from the submeters and provides the fee report, submetering provides more accurate bills for tenants without creating extra work for the property manager. Subjective billing methods can open the door for disputes. Submetering provides fair and defensible charges that can’t be disputed by tenants claiming that unusually high bills are incorrect. “Wireless submetering takes the argument out of the bill,” says Chris Larcinese, vice president of product management and marketing at Inovonics, Inc., a provider of high-performance wireless sensor networks for commercial and life safety applications. Water usage data recorded from Inovonics’ wireless submetering systems is sent to Read, Bill & Collect (RBC) companies that generate fee reports for property managers. A Connecticut case highlights the importance of providing accurate water bills for tenants. There, a dispute over the amount of a water bill that a tenant owed to its owner resulted in protracted litigation that could have been avoided if the owner had used a wireless submetering system. The owner’s failure to bill tenants individually for usage made it difficult for the court to determine if the tenant’s unusually high bill was correct. Although the court eventually decided that the tenant wasn’t at fault for the overages, the dispute could have been settled without having to go to court if there had been an objective calculation of the charges such as the method used in RBC reports [Blasco v. Commercial Linens, LLC et al., Dec. 2009]. Reduce Costs with Long-Term Investment Submetering increases productivity because tenants that are paying for exactly the amount of water they use tend to report and respond to water-related maintenance needs more quickly than they typically would if they were paying a proportionate share of the water bill for the entire property. When tenants quickly report their own problems, property managers can respond to and fix issues that could become long term if left unchecked. “A wireless submetering system encourages tenants to respond to maintenance needs, reducing costs for the property manager,” notes Larcinese. “A tenant with a leaky toilet or faucet knows that the problem will be costly for them and will report it immediately, which helps the property manager fix the problem before it causes real damage,” he points out. Wireless systems also are a good investment because, unlike hard-wired systems, they don’t have to be removed and reinstalled to accommodate retrofitting or buildouts. They can be installed in an office building or center’s current infrastructure. “A wireless system allows flexibility for installing submetering equipment at a commercial property, even if it is a challenge because of structural limitations,” says Larcinese. COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT 183
  10. 10. 9: CAM COSTS Keep Property Competitive In addition to saving time and money, a wireless submetering system also can help you make your office building or center more competitive than similar properties by increasing net operating income. Since the economic downturn, property managers have focused on driving net operating income by minimizing operating expenses. To do so, they are spending money on areas of their properties that have been damaged because tenants have not reported issues—such as leaks and other utility problems—in a timely manner. Installing a wireless submetering system helps catch those issues before they become costly. A wireless submetering system not only gives tenants more control over their water costs, it also creates an incentive for them to conserve water, 184 helping you “green” your building or center—a feature that is important to many prospective tenants. Green buildings and centers with efficient utility systems have higher face rates, resale values, operating income, and occupancy rates than those that don’t—all major factors in increasing their marketability. Additionally, providing more equitable billing improves tenant satisfaction and retention. It’s worth discussing the option of submetering your building’s or center’s main water meter with the owner. Submetering will allow you to save time on your water metering, collection, and billing process and make a green improvement that can increase net operating income in an economy where it is critical to take advantage of every opportunity to get an edge over competing properties. COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT
  11. 11. 9: CAM COSTS How to Resolve CAM Disputes over Tenants’ Square Footage S ometimes a tenant gets upset when it discovers that the size of its space as described in the lease is larger than the actual area the tenant believes it occupies. The more square feet a tenant occupies, the higher proportion of your center’s CAM and other charges it’ll have to pay. So if a tenant feels an inflated calculation of the size of its space has caused it to be overcharged for CAM, it may refuse to pay some or all of its CAM or other charges, says shopping center executive Kurt Sullivan. Tenants often fail to understand that square footage can be measured or determined in a number of ways, and the way it’s determined in the lease may be different from the way the tenant measured it. But once you explain to a tenant what the lease clause describing the size of the ten­ nt’s space a means, you’ll be much more likely to get the tenant to drop its objections and pay up, says Sullivan. We’ll tell you what to say to a tenant that withholds CAM and other charges over a square-footage dispute. And we’ll also give you a Model Letter you can send the tenant to spur compliance. Take Four Steps to Get Tenant to Pay Step #1: Check lease description of square footage. Your lease may describe the tenant’s space in a number of ways. But most leases say one of two things about the tenant’s space, says attorney Gary A. Goodman: ■ That the tenant’s space is simply “deemed” to be, without further elaboration, a certain square footage; or ■ That the tenant’s space is a certain square footage based on a certain method of calculation. Step #2: Explain square footage description in lease. What you will say to your tenant depends on whether the method of calculating square footage is spelled out in your lease: ♦ Tenant’s space “deemed” to be certain size. If your lease simply says that the space is “deemed” to be a certain square footage without further elaboration, tell the tenant that both of you agreed in the lease what the square footage would be. Add that there are many different ways of measuring square ­ footage, so, for ease of convenience, the lease set forth a concrete square footage to avoid disputes. ­ Also tell the tenant that “deemed” does not necessarily mean the space actually has such footage. The law may even be on your side if the tenant disputes the square footage in court. In one case an owner tried to evict a tenant for nonpayment of rent. The tenant claimed that it was overbilled because part of its rent was based on the square footage of its space. The lease said the tenant was “deemed” to have 660 square feet of space, but the tenant claimed it had only 414 square feet. The owner asked a New York court to dismiss the tenant’s counterargument without a trial, and the court agreed. The lease said that the space was “deemed” to be 660 square feet. That did not mean that the space had to actually be 660 square feet in size [Wohl v. Owen, 1992]. ♦ Method of calculating tenant’s space spelled out in lease. If your lease describes how square footage is calculated, meet with the tenant and show it how the calculation is to be made. Leases commonly require measurements to be made to the midpoint between walls. To measure the distance inside walls, take a tape measure and go outside the tenant’s space so you can clearly measure half the distance the wall takes up between the tenant’s space and the adjacent tenant’s space. Sullivan says that in most cases the tenant will agree to pay what’s owed once it understands how the square footage figure was arrived at. Step #3: Send get-tough letter. What if the tenant still does not agree with your interpretation of the lease or says it agrees but still does not pay its CAM or other charges? At that point you should send a get-tough letter to get the tenant’s attention, recommends Sullivan. He has successfully used gettough letters to persuade tenants to pay their CAM and other charges. Your letter, like our Model Letter, should: ■ Mention that the tenant has not paid CAM and other charges for the month; ■ Recount the discussion you had with the tenant, about either the meaning of the word “deemed” or your efforts to show the tenant how the space had been measured; ■ Mention if the tenant agreed to pay its CAM and other charges; ■ State that you have not received payment; ■ Tell the tenant that it’s violating its lease by not making full payment of the CAM charges that COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT 185
  12. 12. 9: CAM COSTS are due, pointing out the specific lease clause that requires it to do so; ■ Make it clear that the tenant’s continued failure to pay the full amount due will amount to a default on the lease; and ■ Inform the tenant that you may take legal action if the tenant does not pay the full amount due by a specified date. 186 Step #4: Take legal action to repossess space. In most cases your get-tough letter should convince the tenant to pay up in full. If the tenant does not comply with your get-tough letter, you can, as a last resort, follow the procedures in your lease to declare the tenant in default on its lease and sue to evict the tenant. But talk with your attorney before taking such a drastic step. COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT
  13. 13. 9: CAM COSTS Model Letter: Explain Square Footage Measurement and Get CAM Payment from Tenant You can adapt this letter and send it to a tenant that refuses to pay its monthly CAM and other charges, like property taxes and marketing fees, because it believes that the square footage listed in its lease is inaccurate. The letter, put together with the help of attorney Gary A. Goodman and shopping center executive Kurt Sullivan, assures the tenant that the size of its space as described in its lease is correct and that the tenant must pay overdue CAM and other charges. The letter comes in two versions. One reminds the tenant that the space was measured in accordance with the calculation method set out in the lease. The other points out that the size of the space was only “deemed” to be a certain size, which does not actually mean that it is that size. To give the tenant a short deadline to comply, it’s a good idea to deliver the letter by hand. But first show the letter to your attorney. [Insert date] Dear John Tenant: [Version #1: Use this version when the lease describes how square footage is calculated.] You have refused to pay your full CAM charges and marketing fees for the month of [insert month & year] because you claim the measurement of the square footage in your lease is incorrect. Section 3.14 of your lease says your space is 2,500 square feet, but you claim it’s only 2,000 square feet. On [insert date], we went over the measurement of your space as detailed in section 3.14 to show you how the measurement was calculated. At the time you said you understood and agreed to pay the full amount of the monthly CAM charges, $[insert amount owed], that had been assessed to you. [Version #2: Use this version when the lease only says the space is “deemed” to be a certain square footage.] You have refused to pay your full CAM charges and marketing fees for the month of [insert month & year] because you claim the measurement of the square footage in your lease is incorrect. You claim that the square footage of your tenant space is only 2,000 square feet, while section 3.14 of your lease says your space is deemed to be 2,500 square feet. We explained that the phrase “the square footage is deemed to be” does not require the square footage to actually be any particular amount, and many courts have agreed with such an interpretation. At the time you said you understood and agreed to pay the full amount of the monthly CAM charges and marketing fees, $[insert amount owed], that had been assessed to you. However, we have not received payment since we spoke, and the payment is still due. This is a violation of your lease and a very serious matter. Section 6.9 of your lease requires you to pay your monthly CAM charges and marketing fees in advance on the first of the month. In addition to violating your lease, you are making it harder for us to provide the services we need to keep the center operating. Please pay $[insert amount owed] you owe us by [insert date]. Continued violation of this provision of your lease will constitute a default on your lease. If such a violation continues, we reserve the right to take legal action against you as provided under the terms of your lease. Yours truly, Jane Manager COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT 187
  14. 14. 9: CAM COSTS How to Charge Small Tenants Interest on Amortized CAM Expenditures S uppose your center needs to make a major CAM expenditure to, say, repave the parking lot, replace the roof, or install energy-efficient lights. Some leases, especially those of smaller tenants, may let you bill the full amount of the expenditure to CAM all in one year. But some small tenants may have difficulty paying their share of this amount in one lump sum. They may only be able to pay if you amortize the amount of the major expenditure over a period of several years. But before you agree to do this, you should get the tenant to agree to pay you the interest you’d earn in the bank if the tenant were able to pay you its share in one lump sum. We’ll tell you how to do this, and we’ll give you a Model Agreement that you and the tenant should sign to confirm your agreement to accept amortized payments and its agreement to pay interest in addition to its amortized payments. Center Collects $30,000 in Interest Former shopping center executive Alan A. Alexander once needed to make a major CAM expenditure to repave his center’s parking lot. He knew that the leases allowed him to bill the repaving costs to tenants in one lump sum as part of CAM charges. But he also knew that some of the smaller tenants might have problems paying that much money all at once. So he agreed to let his smaller tenants pay their share of the repaving costs over three years, if they agreed to pay interest. By doing this, he collected nearly $30,000 in interest for the center. Get Tenants’ Agreement If you want to go this route, you’ll need to get your tenants to agree in writing to pay interest on the amount of the amortized payments. You can do this by sending tenants that say they cannot pay the full amount an agreement that says they can pay the amount over several years if they’re willing to pay interest on it. The agreement serves two purposes: First, it offers tenants a way to pay what they owe you if they’re low on cash. And second, the agreement, once signed, gives the center the legal right to charge the tenants interest. What Agreement Should Say Your agreement, like our Model Agreement, should: ■ State why you need to make the expenditure; ■ Point out that the lease allows you to charge the tenant the entire amount of the expenditure immediately as part of the tenant’s pro-rata CAM charge; ■ Say that in response to the tenant’s complaint that it cannot pay its share of the expenditure all in one year, you’re agreeing to bill it for its share of the expenditure in installments over a set number of years; ■ Say that since you’ll be out-of-pocket for the amount of the expenditure for several years, you’ll be charging the tenant interest on the expenditure, and explain how interest will be computed; and ■ Ask the tenant to sign and return the agreement to you to formalize its consent to be charged interest on this expenditure. And say that if the tenant does not sign and return the agreement by a certain date, you’ll charge the tenant for its entire share of the major CAM expenditure in that year. Key Issues to Decide Once you decide to allow a tenant to make amortized payments with interest, you have several key decisions to make: Length of amortization period. Alexander recommends that you bill the tenant for improvements over as short a period as possible, taking into account the tenant’s ability to pay and the length of the lease. Tenants will always push you to amortize a cost over the length of the useful life of the item. But that’s obviously not to your advantage, since it lengthens the time before you finally get repaid. ✦ PRACTICAL POINTER: If a tenant’s lease term ends in the near future, you may not be able to offer this amortization option. What interest rate to charge. You might want to charge the tenant the interest rate at which you would be charged for borrowing money from a bank, says Alexander. If you do not know what you would be charged for interest, simply call a few banks to find out, Alexander adds. ✦ PRACTICAL POINTER: Check with your attorney to see whether the interest rate you plan to charge is legal. 188 COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT
  15. 15. 9: CAM COSTS Model Agreement: Get Tenants’ Written Agreement to Pay Interest for Amortized Expenditures This Model Agreement was created with the help of attorneys Abraham Lieberman and Gary Goodman, and former shopping center executive Alan A. Alexander. Use it when you have the right to bill a major CAM expenditure to the tenant all in one year but you agree to amortize the tenant’s share of the expenditure over several years instead. The letter tells the tenant it must pay interest on its share of a CAM expenditure in return for being permitted to pay its share of the expenditure over several years. Speak to your attorney about adapting this letter for your use. [Insert date] Dear John Tenant: We need to fix large cracks in the parking lot later this year. These large cracks detract from the center’s appearance and could cause shoppers to slip and fall. We expect that this work will cost $400,000. Your lease permits us to charge you the entire amount of your share of this CAM expenditure as part of your pro-rata CAM charge. But you have notified us that paying the entire amount of your share of this CAM expenditure in one year would be a significant financial burden on you. Therefore, we have agreed to bill this amount to you over four years starting in July of this year. But since we will be out-of-pocket for the costs of the repaving for several years, we will be charging you 10 percent interest to partially compensate ourselves for our lost use of such funds. We believe that 10 percent is a fair market rate since this is the rate that we would be charged for borrowing the money. Interest will be computed as follows: At the beginning of every fiscal year, the outstanding unpaid principal amount of the repaving costs will be multiplied by the interest rate (10%). This amount will ­ be $40,000 ($400,000 x 10%) in the first year, $30,000 ($300,000 x 10%) in the second year, $20,000 ($200,000 x 10%) in the third year, and $10,000 ($100,000 x 10%) in the fourth year. Each year you will pay your share of the appropriate interest amount in addition to your share of the amortized principal on a monthly basis. ­ We would like to formalize your consent to pay interest as outlined above for this expenditure. By signing below and returning this agreement to us, you agree to be charged your share of the interest for this expenditure for the next four years starting in the fiscal year 20___, in return for being permitted to pay your share of this expenditure over four years (also starting in the fiscal year 20___). If you do not sign and return this agreement by [insert date], we will not charge you interest on your share of the CAM expenditure. We will instead bill you immediately for your entire share of the CAM expenditure in 20___. Owner’s Signature_ ______________________________________________________________________ Date________________ _ Tenant’s Signature________________________________________________________________________ Date________________ COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT 189
  16. 16. 9: CAM COSTS Many states have “usury laws” that limit the maximum rate of interest you can charge tenants, says attorney Gary Goodman. If you charge a rate higher than your state permits, you could end up in hot water, he says. How to compute interest. There are several ways to compute interest. One of the most common is to compute and assess interest on the principal balance remaining at the beginning of each year as it declines and to charge the tenant for its share of that interest based upon the amount of principal remaining. That’s what Alexander does. EXAMPLE: A tenant that occupies 10 percent of the center must pay its share of the cost of repaving the parking lot over four years. The principal cost is $400,000. That means the tenant will pay its share of $100,000 in principal every year ($400,000 ÷ 4). The tenant will also pay its share of 10 percent interest on the principal amount as it declines. 190 That means the total interest would be: Yr. 1: Yr. 2: Yr. 3: Yr. 4: $40,000 ($400,000 x 10%) $30,000 ($300,000 x 10%) $20,000 ($200,000 x 10%) $10,000 ($100,000 x 10%) Adding that interest to the principal due, the tenant would pay: Yr. 1: $14,000—ts share of $140,000 i ($100,000 + $40,000) Yr. 2: $13,000—ts share of $130,000 i ($100,000 + $30,000) Yr. 3: $12,000—ts share of $120,000 i ($100,000 + $20,000) Yr. 4: $11,000—ts share of $110,000 i ($100,000 + $10,000) COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT
  17. 17. 9: CAM COSTS Get Key Protections When Settling CAM Overcharge Claim C AM audits can be a big source of anxiety for you. If a tenant claims that it has been overcharged, you may decide it’s more cost-effective to settle with the tenant than to wind up in court. But settling with the tenant can be tricky. Without protections in the settlement agreement you sign with the tenant, you might find yourself in hot water. For example, without a confidentiality requirement in the settlement agreement, a talkative tenant could start a wave of audits by other tenants. Or without an acknowledgment by the tenant that it has fully inspected your books to its satisfaction, the tenant may claim that there was another overcharge (based on an earlier operating expense statement) immediately after the settlement, forcing you to go through yet another settlement. With the help of attorney Marc L. Ripp, we’ve come up with a list of protections to include in your settlement agreement. And we’ve given you a Model Agreement you can adapt and use, which contains these precautions. What Settlement Agreement Should Say Your settlement agreement, like our Model Agreement, should do the following: Identify parties. At the beginning of the settlement agreement, identify the parties to the agreement—that is, you and the tenant. Also, give the sections of the lease that permit the tenant to audit [Agr., intro.]. Say tenant acknowledges records inspection. Include a statement that says the tenant acknowledges that it fully inspected your books and records to its satisfaction, pursuant to the lease’s audit clause. You do not want the tenant to later argue that it was not given an adequate opportunity to audit, says Ripp [Agr., par. 1]. State terms of settlement. Spell out the particulars of the settlement—for example, how much you’ve agreed to pay [Agr., par. 2]. Say you’re not at fault. Say that by settling with the tenant, you are not admitting any fault. That prevents the tenant from suing you, claiming that you violated the lease. Also say that by settling with the tenant, you are not waiving any remedies available to you against the tenant. That way if, for example, you discover later that you actually undercharged the tenant, you’ll be able to bill it for the amount it owes, says Ripp [Agr., par. 2]. Make tenant waive right to further audit. Make the tenant agree that it won’t audit any other operating expense statements available to it before the settlement. This prevents the tenant from challenging other statements it has already gotten, says Ripp [Agr., par. 3]. Say operating statements deemed correct. Say that all operating statements the tenant got from you before the date of the settlement agreement are deemed to be correct—that is, they’re consistent with sound accounting principles. Also say that the statements were consistent with the applicable lease provisions. This prevents the tenant from claiming that other operating statements were incorrect, Ripp explains [Agr., par. 4]. Demand confidentiality. It’s critical that you make the tenant agree to keep both the terms of the settlement and the audit results confidential. Say in the agreement that the terms won’t be disclosed by anyone affiliated with the tenant—such as its partners, associates, attorneys, agents, and/or representatives. Most important, say that the tenant’s auditor cannot disclose any of this information either. Also say that the tenant will be responsible if it or any of the listed associates violate this confidentiality obligation, Ripp says [Agr., par. 5]. Set damages. You’ll need to spell out the damages you’ll be entitled to if the tenant violates the settlement agreement. Ripp suggests that you give yourself the right to the following: ♦ Liquidated damages. Set an amount of liquidated damages that the tenant must pay if it violates the settlement agreement. Say in the agreement that you’ve set this liquidated damages provision because it would be too difficult to calculate actual damages if the tenant were to violate the agreement [Agr., par. 6]. And make the tenant acknowledge that the amount of damages you’ve set is reasonable. Otherwise, the tenant may later argue that the provision is an unenforceable penalty [Agr., par. 7]. ♦ Lease violation. Say that the tenant’s violation of this agreement will be material—that is, a major—violation of its lease. That way, you can pursue your remedies under the lease, including eviction, Ripp explains [Agr., par. 6]. COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT 191
  18. 18. 9: CAM COSTS Say you’re not waiving your remedies. It’s a good idea to say that you’re not waiving any remedies you have under the law or the lease. That way, if you need to go to court to force the tenant to pay damages, you can do so, Ripp says [Agr., par. 8]. Get tenant to waive right to trial. Make the tenant waive its right to a jury trial if either side needs to go to court. A nonjury trial usually moves quicker 192 and costs less. Also, juries in landlord/tenant disputes tend to decide in favor of the tenant, says Ripp [Agr., par. 9]. Say tenant must pay all court costs. Require the tenant to pay all your costs, including legal fees, associated with your enforcement of the settlement agreement, says Ripp [Agr., par. 10]. COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT
  19. 19. 9: CAM COSTS Model Agreement: Settle CAM Overcharge Dispute by Signing Settlement Agreement with Tenant The following settlement agreement, prepared with the help of New Jersey attorney Marc L. Ripp, can be used when you’re settling a CAM overcharge dispute with a tenant. Talk with your attorney about adapting the Model Agreement for your situation. SETTLEMENT AGREEMENT This Settlement Agreement is being executed by [insert Landlord’s name] and [insert Tenant’s name] in connection with an audit of the [insert year] Operating Statement that Tenant conducted pursuant to Section [insert #] of Tenant’s lease for the Premises (“Lease”). The term Operating Statement used in this Settlement Agreement is defined in Section [insert #] of the Lease. 1. Tenant’s audit. Tenant hereby acknowledges that it has fully inspected, to its satisfaction, the books and records of Landlord, in accordance with Section [insert #] of the Lease, for the purpose of verifying the [insert year] Operating Statement. 2. Settlement terms. Tenant has alleged the existence disseminated in any manner whatsoever, in whole or in part, by Tenant or by its partners, associates, attorneys, shareholders, employees, directors, officers, agents, and/or representatives (including, but not limited to, Tenant’s auditor). Tenant shall be strictly liable for any breach of this Settlement Agreement by Tenant, its partners, associates, attorneys, shareholders, employees, directors, officers, agents, and/or representatives (including, but not limited to, Tenant’s auditor). 6. Landlord’s damages. Should this Settlement Agree- ment be breached, Tenant understands that Landlord would suffer damages in an amount impossible to measure with any degree of certainty. Accordingly, Tenant agrees that if this Settlement Agreement is breached: of certain supposed overcharges in the [insert year] Operating Statement. Landlord denies the existence of any overcharges in the [insert year] Operating Statement. Without admitting fault or liability and without accepting Tenant’s position in the contested matters raised by Tenant during its verification of the [insert year] Operating Statement, Landlord agrees to pay, and Tenant hereby acknowledges receiving from Landlord, the sum of $[insert settlement amt.] in full settlement of all past, present, and future claims of Tenant relating to the [insert year] Operating Statement. Payment by Landlord of said $[insert amt.] shall neither prejudice Landlord’s rights nor waive its remedies against Tenant. 7. Liquidated damages not penalty. Tenant acknowledges 3. No further audit. Tenant agrees to forever and perma- 8. No waiver of Landlord’s remedies. Reference to any par- nently withdraw, cancel, and terminate all inspections, reviews, audits, and verifications of any and all Operating Statements that may have been received by Tenant on or before the date hereof. 4. Operating statements deemed correct. Furthermore, (a) Tenant shall pay Landlord, on demand as liquidated damages, the sum of $[insert amt.] as additional rent under the Lease; and (b) Tenant shall have materially breached the Lease. that the remedies set forth in the immediately preceding paragraph do not constitute a penalty, but rather are reasonable and have been negotiated in good faith to approximate the foreseeable harm Landlord would actually endure if this Settlement Agreement were breached. ticular remedies in this Settlement Agreement shall not preclude Landlord from any remedy allowed in equity, under law or pursuant to the Lease. 9. Waiver of jury trial. Tenant hereby waives the right to trial by jury in any action or proceeding that may hereafter be instituted in connection with this Settlement Agreement. Tenant hereby acknowledges that all Operating Statements received by Tenant on or before the date hereof are hereby irrevocably deemed complete, correct, in full accord with sound accounting principles, and in strict compliance with all applicable provisions of the Lease. 10. Tenant pays Landlord’s costs. Tenant shall pay Landlord 5. Confidentiality. Tenant acknowledges that (a) all infor- 11. Tenant’s signature. If Tenant is in agreement with mation Tenant acquired during its verification of the [insert year] Operating Statement and (b) all the terms of this Settlement Agreement are extremely sensitive, private, and confidential. To induce Landlord’s payment of the aforementioned $[insert amt.], Tenant expressly agrees to keep all of said information and the terms of this Settlement Agreement (collectively, the “Privileged Information”) private and confidential. Tenant further agrees that the Privileged Information shall not be disclosed, reproduced, distributed, discussed, or all of Landlord’s expenses, including, but not limited to, attorney’s fees, court costs, and disbursements, in enforcing this Settlement Agreement. the terms of this Settlement Agreement, please so indicate by signing and returning to Landlord one (1) original counterpart of this Settlement Agreement, whereupon this Agreement shall be fully binding and legally enforceable between the parties. CONFIRMED AND AGREED TO AS OF THE DATE FIRST WRITTEN ABOVE. Landlord’s signature Date_ ____________________________________ Tenant’s signature Date_ ______________________________________ _ COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT 193
  20. 20. 9: CAM COSTS Use Payout Agreement to Collect CAM Reconciliation Amounts I deally, when you reconcile your CAM costs at the end of the year, you want your actual CAM costs to be close to the estimate you projected so that your tenants will owe you little or no additional CAM costs. But sometimes unexpected price changes (for example, an increase in electricity rates) can send your actual CAM costs way above the estimate. And a small tenant, especially a mom-and-pop, may not be able to pay the additional CAM costs it owes in a lump-sum payment. depending on how the note is worded, you may not be able to evict the tenant, Ripp explains. Rather than evicting the tenant or suing it for money it does not have, you may want to agree to let it pay you the amount it owes in installments. To memorialize this agreement, you and your tenant can sign a payout agreement that spells out the payment terms. Shopping center executive Frederick J. Meno has successfully used payout agreements to get CAM reconciliation payments from tenants that otherwise could not pay a lump sum. We’ll tell you why you should have a written payout agreement, when to offer a payout agreement to a tenant, and what your payout agreement should say. And we’ll give you a Model Agreement, put together with the help of attorney Marc L. Ripp, which you can adapt and use at your center. Sometimes after you bill tenants for unexpected CAM costs found during the reconciliation process, a tenant will tell you it does not have the money to pay you in one lump sum. If this happens, do not automatically take the tenant’s word for it, says Meno. Ask the tenant for up-to-date financial statements to verify this claim. Also, look at the tenant’s gross sales reports. If the tenant’s occupancy costs (rent, CAM, and other charges) are more than 12 percent of its revenue, that’s a sign that the tenant may be telling the truth, says Meno. If you conclude that the tenant does not have the money to pay, you can agree to a payout schedule. Otherwise, you can take the steps specified in your lease to notify the tenant that it’s in default. Avoid Trouble with Written Payout Agreement What Payout Agreement Should Say It’s important to put a payout agreement in writing. Managers often make the mistake of making an oral agreement, accepting a promissory note, or taking payment from the tenant’s security deposit, says Ripp. Here’s what could go wrong in those situations: Oral agreement may end in dispute. When an agreement is not written down, centers and tenants often end up in disputes over how much is owed, when it’s owed, etc. And if you end up in court to settle the dispute, it will be your word against the tenant’s, says Ripp. Promissory note may jeopardize eviction right. A promissory note may seem okay because it puts the agreement in writing. But a promissory note may compromise the center’s legal position. Technically, it takes the debt out of the lease and changes the relationship of the parties from landlord and tenant to creditor and debtor, says Ripp. As a result, if the tenant does not pay, you can sue on the note. But 194 Taking payment from security deposit leaves center without protection. While taking payment from the security deposit solves the immediate cash shortfall, it may leave the center without protection if the tenant violates the lease in some other way. When to Use Payout Agreement If you decide to let the tenant pay in installments, make sure you do the following in your payout agreement: Specify amount owed. Specify how much the tenant owes, says Ripp [Agr., preamble]. This is important if you must later sue the tenant for not making payments under the agreement. By stating the debt, the tenant cannot claim later that no debt exists or that the debt is less than you say it is, says Ripp. Make tenant acknowledge no defenses or claims. If possible, get the tenant to acknowledge in the agreement that it has no defenses under the lease for not making the payout agreement payments, advises Ripp. If you sue the tenant for failing to make scheduled payments under the payout agreement, you do not want the tenant to argue that it did not pay because you violated the lease by, say, wrongly overcharging it for CAM or failing to fix a leaky roof. Also, get the tenant to acknowledge that it has no claims against you (for example, that you’re in violation of the lease) at the time you signed the payout agreement, says Ripp [Agr., par. a]. Other- COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT
  21. 21. 9: CAM COSTS Model Agreement: Get Tenant to Pay Reconciliation Amounts in Installments to Avoid Eviction Here’s an example of a payout agreement you can use when a tenant is unable to pay the difference between the estimated CAM costs it paid and the actual CAM costs due after you reconcile CAM costs. This agreement is based on one prepared by attorney Marc L. Ripp. Both you and the tenant should sign the agreement. Talk with your attorney about modifying it to conform to your circumstances and your state’s laws. PAYOUT AGREEMENT WHEREAS, [insert tenant’s name] (“Tenant”) is renting [insert address of space] (the “Premises”) from [insert owner’s name] (“Owner”) under a certain lease dated [insert date of lease] (the “Lease”); WHEREAS, as of the date of this Agreement, Tenant has an outstanding balance in unpaid CAM charges of $5,000 (the “Unpaid CAM Charges”); WHEREAS, Tenant’s failure to pay the Unpaid CAM Charges constitutes a material default of the Lease, entitling Owner to terminate Tenant’s possessory rights under the Lease (the “Default”); and WHEREAS, Owner wishes to grant and Tenant wishes to receive an opportunity to cure the Default without terminating the Lease; NOW, THEREFORE, in consideration of Owner’s agreement not to terminate the Lease for the Default, Tenant agrees to the following terms. Unless otherwise indicated, capitalized terms herein shall have the meanings assigned to them under the Lease. a. No Defense or Claims. Tenant acknowledges that it has no defenses for its failure to pay said Unpaid CAM Charges. Tenant also acknowledges that it has no claims or causes of action against the Owner, its agents, employees, or assigns. b. Schedule of Repayment. Tenant agrees to pay $1,250 per month to Owner not later than the first of the month for the next four months of the Lease, commencing Dec. 1, 20___. The Unpaid CAM Charges will thereby be reduced according to the following schedule: Dec. 20___ = $3,750   Jan. 20___ = $2,500   Feb. 20___ = $1,250   March 20___ = $0 c. Current Charges. Tenant agrees and acknowledges that said monthly payments are in addition to, and not in lieu of, Rent, Additional Rent, and all other payments due under the Lease; and Tenant shall continue to promptly pay Rent, Additional Rent, and all other payments due under the Lease as they become due. d. Default. In the event Tenant fails to make a timely payment under this Agreement or fails to promptly pay Rent, Additional Rent, or all other payments due under the Lease, then Tenant shall be considered in default of its obligations under this Agreement and Lease, and the Unpaid CAM Charges shall become immediately due and payable and the terms of this Agreement shall be null and void. e. Payment Priority. All payments received by Owner shall be applied first to amounts due under the Lease, which shall include, without limitation, Rent and Additional Rent, and then to the Unpaid CAM Charges. f. No Waiver. Nothing in this Agreement constitutes a waiver of Owner’s rights under the Lease, and Owner reserves the right to sue and evict Tenant for past and future Defaults of the Lease, including, but not limited to, failure to pay Rent or Additional Rent. Owner__________________________________________________________________________________ Date________________ Tenant__________________________________________________________________________________ Date________________ COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT 195
  22. 22. 9: CAM COSTS wise, the tenant may refuse to pay you, claiming that before the payout agreement was signed, you overbilled it for CAM expenses. Set repayment schedule. Say how much the tenant must pay you each month to pay off the money it owes. Specify the payment dates and the balance due after each payment is made [Agr., par. b]. This leaves no room for argument about how much the payments are, when they’re due, or the amount of the tenant’s debt at any point during the repayment schedule. Require tenant to continue to pay rent. Be sure to say that the payments under the payout agreement do not affect the tenant’s obligation to continue making regular monthly payments of rent, CAM, and other amounts due under the lease, says Ripp [Agr., par. c]. Give yourself the right to accelerate debt for missed payment. To protect yourself in case the tenant misses a scheduled payment under the payout agreement or a rent or CAM payment under the 196 lease, make sure you have the right to accelerate the debt—that is, make all the outstanding payments become due immediately [Agr., par. d]. The tenant should not be entitled to benefit from the payout agreement if it does not fulfill its end of the agreement or lease by making payments promptly. Give yourself the right to apply payments to current charges first. Say that any payment the tenant makes will apply first to the tenant’s current charges due under the lease, such as rent or CAM, and then to the amount it owes under the payout agreement [Agr., par. e]. Reserve your right to sue. Reserve the right to sue the tenant for past and future lease defaults, including its failure to pay the CAM charges it owes. [Agr., par. f]. This will prevent a tenant that violates the payout agreement from arguing that by entering into the agreement, you waived your right under the lease to sue it for eviction for not making the required payments. COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT
  23. 23. 9: CAM COSTS Avoid Payment Disputes with Major Tenants over Unbudgeted CAM Costs/Operating Expenses A t the beginning of every year, you present a projected CAM cost or operating expense budget to your tenants, and if you’ve done your homework, there shouldn’t be any unexpected costs during the year. But every once in a while—despite the best planning—you may unfortunately need to incur a large CAM cost or operating expense that wasn’t part of the projected budget. Typically, such unbudgeted costs are for unexpected repairs. And this cost won’t be covered by your tenants’ monthly or quarterly CAM cost or operating expense payments—which may lead to problems with your center’s anchor tenants or your office building’s major tenants. Unlike less powerful tenants’ leases, an anchor’s or major tenant’s lease often requires you to get its consent to an unbudgeted CAM cost or operating expense that exceeds a certain amount before it will agree to pay its share of that cost. Thus, if you don’t get the anchor’s or major tenant’s consent, you may be unable to collect its share of that sizable cost. To make sure you can collect your anchors’ or major tenants’ share of any unbudgeted CAM cost or operating expense, get their written consent before you incur that cost, advises Washington commercial property executive Richard F. Muhlebach. We’ll tell you what steps you should take to get consent from an anchor or a major tenant. We’ll also give you a Model Consent that you can adapt and use. And we’ll tell you what your options are if an anchor or a major tenant refuses to consent. Step #1: Solicit, Select Bids Before you discuss the unbudgeted CAM cost or operating expense with an anchor or a major tenant, solicit bids for the necessary work, evaluate those bids, and select the best one, suggests Muhlebach. Don’t involve the anchor or major tenant in this process, as it’s not appropriate and the anchor or major tenant may have its own idea of which bidder should get the job, he warns. For example, the anchor or major tenant may want to use a contractor whose bids are always very low but whose work is below your building’s or center’s standards, he explains. Step #2: Discuss CAM Cost/Operating Expense with Anchor/Major Tenant After you have selected a bid, discuss the unbudgeted CAM cost or operating expense with your anchor or major tenant, says Muhlebach. Explain why the repair or improvement is needed and must be done immediately, he suggests. And tell the anchor or major tenant what the cost will be for the repair or improvement, he says. You may also want to explain the bid solicitation process and why you selected the contractor that you chose, he adds. ✦ PRACTICAL POINTER: In rare instances at shopping centers, you may also need to get consent from some national, inline tenants to an unbudgeted CAM cost that exceeds a certain amount. Check those tenants’ leases, and if you need their consent, follow the same steps as for anchor tenants. Step #3: Get Anchor/Major Tenant to Sign Written Consent You may be tempted to simply rely on the anchor’s or major tenant’s oral consent, but that would be a mistake, Muhlebach warns. The anchor or major tenant may forget that it gave you its consent. Or it may claim that it consented to pay its share of the cost of a different kind of repair—or that you gave it a false rationale for the work when you asked for its consent, he says. Thus, if the anchor or major tenant consents to the unbudgeted CAM cost or operating expense, send it a written consent to sign and return to you, he advises. Then if the anchor or major tenant makes such claims, you can produce a signed consent that refutes those claims. Your consent, like our Model Consent (which is in the form of a letter to the anchor), should: ■ Remind the anchor or major tenant of your conversation about the needed repair or improvement, explaining it again in detail and the consequences if the work isn’t done. For example, if the parking lot needs repaving, note that failing to repave could cause accidents or will become a bigger, more expensive job if not done now; ■ Specify the section of the anchor’s or major tenant’s lease that requires you to seek its consent; COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT 197
  24. 24. 9: CAM COSTS ■ State the cost of the work and the name of the contractor you’ve selected to perform the work; ■ Describe the area where the work will take place and how it will disrupt the anchor or major tenant, if at all. If you can get the information in advance, also estimate how long the work will take and during what hours; and ■ Request the tenant’s signature to the consent letter within a certain time—for example, five days—and state that its signature indicates its consent to pay its share of this CAM cost or operating expense. ✦ PRACTICAL POINTER: As the work is done, unexpected problems may increase the cost. If so, go back to the anchor or major tenant to get its written consent to pay for its share of any increases, Muhlebach recommends. What if Anchor/Major Tenant Refuses to Consent? You will have to decide whether to make the repair or improvement anyway or wait until next year, when you can include the cost in your CAM cost or operating expense budget, says Muhlebach. But if the repair or improvement raises safety issues—such as damage to the building’s or center’s façade, which could fall on a passerby—you may have no choice but to go forward with the work, he notes. You will still be able to pass the unbudgeted CAM cost or operating expense to your other tenants, either by billing them for their share at the end of the year, when the CAM costs or operating expenses are reconciled, or by adjusting their CAM cost or operating expense payments in midyear, Muhlebach says. You will then have to decide whether you have grounds for suing the anchor or major tenant for its share of the unbudgeted CAM cost or operating expense. If not, you may have to simply absorb its share of that cost, Muhlebach says. What do you do if, after you’ve discussed the unbudgeted CAM cost or operating expense with your anchor or major tenant, it refuses to consent? 198 COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT
  25. 25. 9: CAM COSTS Model Consent: Get Major Tenant’s Written Consent to Pay Its Share of Unbudgeted CAM Cost/Operating Expense This Model Consent, which was written with help from commercial property executive Richard F. Muhlebach, is in the form of a letter from the owner to an anchor tenant of a shopping center. The consent states the proposed repair or improvement and why it’s needed, the lease section that requires the anchor’s approval, the cost of the job, the contractor’s name, the time and location of the work, and the need for the anchor to sign the letter to signify its consent to pay its share of the cost. The Model Consent describes an unbudgeted CAM cost or operating expense related to repaving part of the center’s parking lot. Speak with your attorney about adapting this consent to your situation. [Insert date] Re: Repaving Part of ABC Shopping Center’s Parking Lot Dear Jane Tenant: As discussed in our conversation of [insert date of conversation with tenant], the northern half of the parking lot at ABC Shopping Center needs an overlay. The large trucks using the area and the harsh winters have taken their toll. If we do not repave that section soon, the damage could cause accidents and we may have to remove and replace the pavement, which would cost considerably more than making repairs now. Section [insert # of consent section] of your lease requires us to seek your consent to pay your share of any unbudgeted [CAM Cost/Operating Expense] in excess of $10,000. We have bid out the project and are now seeking such consent before we contract with [insert contractor’s name] to repave the parking lot at a price of $21,000. The repaving will be done in the area hatched in black on the attached map. While the work is under way, parking will be available only in the southern half of the lot. Although access to your space will be blocked on the east-side, employees and customers will still be able to enter on the west-side. [Insert contractor’s name] tells us that, working weekdays from 9 a.m. to 5 p.m., it believes it can get the work done in three (3) days. If you consent to pay your share of the above-described [CAM Cost/Operating Expense], please sign this letter in the space provided below and return it to us within [insert #, e.g., five (5)] days. By signing below, you indicate on behalf of PDQ Store that you have read, fully understood, and consented to pay your share of this [CAM Cost/Operating Expense], in accordance with Section [insert # of CAM cost or operating expense payment section] of your lease. If you have questions, feel free to contact the office. Yours truly, John Manager, ABC Management PDQ Store hereby consents to pay its share of the above-described [CAM Cost/Operating Expense] in accordance with Section [insert #] of its lease. Signature_ ______________________________________________________________________________ Date________________ Print Name Title_ __________________________________________________________________________________________ _ COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT 199
  26. 26. 9: CAM COSTS How to Get Tenants to Pay Higher CAM Costs Midyear I n the course of the year, you may face unexpected CAM cost increases that you did not factor into your original CAM cost estimate and so did not pass on to your tenants. For example, you may face increased property taxes or utility rates, increased security costs due to higher than normal incidents of crime, or increased snow removal costs due to unexpected snowfalls. New centers with no history of CAM costs are more likely than older ones to encounter this problem, says shopping center executive Frederick J. Meno. You could wait until the CAM reconciliation at the end of your fiscal year to bill your tenants for this unexpected cost. But if the unexpected cost is high, say, 7 percent or more of total CAM costs, waiting can hurt your cash flow, says Meno. You’ll have to pay the extra CAM cost out of your own pocket. And if the cost hits you early in the fiscal year, you won’t get reimbursed for many months. To avoid this problem, increase the amount of your tenants’ monthly CAM cost payments midyear, says Meno. We’ll tell you how to decide whether it pays to increase CAM payments midyear. And we’ll give you a Model Letter, prepared with the help of Meno and attorney Marc L. Ripp, that you can send to your tenants notifying them of the CAM cost increase. Check Your Leases Before increasing your tenants’ CAM cost payments midyear, check your leases to see if they permit you to do so. Some leases bar the owner from changing tenants’ CAM cost payments in the middle of the fiscal year, while others give the owner the right to do so. If your lease is silent on this matter, check with your attorney, Ripp advises. high CAM cost increase and you’re far from the end of your fiscal year. If the increase is minimal, or if there are fewer than four months left in the fiscal year, it may not be worth the time and effort to readjust your tenants’ CAM cost payments at such a late date, says Meno. Notify Tenants of Increase If you decide to increase your tenants’ monthly CAM cost payments midyear, send each tenant a letter notifying it of why you must increase its monthly CAM cost payment and how much more it will have to pay, says Meno. Your letter, like our Model Letter, should: ■ State that you’ve incurred an unexpected increase in CAM costs that is much higher than you initially budgeted for when you calculated CAM costs for the year, and tell the tenant what this unexpected increase in CAM costs is due to; ■ Explain the importance of providing the CAMrelated service that led to the unexpected increase; ■ Say that to recoup the unexpected increase in CAM costs and to make your monthly CAM cost billing as accurate as possible, you’re increasing all your tenants’ monthly CAM cost payments for the remainder of the fiscal year, and tell the tenant how much more it will have to pay; ■ Explain that it’s better for the tenant to pay the increase in monthly installments rather than pay a large lump sum, as it would have to if you waited until you reconciled CAM costs at the end of the fiscal year; ■ Say that you would have liked to include this cost in your initial CAM cost estimate, but that the need for additional services was unexpected; and ■ State when the increase will go into effect. Make Sure Increase Is in Your Best Interest Increasing your tenants’ CAM cost payments midyear makes sense only when you’re faced with a 200 COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT
  27. 27. 9: CAM COSTS Model Letter: Notify Tenants of Midyear CAM Cost Increase Here’s an example of a letter you could send to a tenant, notifying it that you’re increasing its monthly CAM cost payments because of unexpected CAM cost increases. The letter, put together with the help of shopping center executive Frederick J. Meno and attorney Marc L. Ripp, tells the tenant why you’re increasing CAM costs and what it’s now responsible for paying. We’ve used a hypothetical heavy snowfall as the basis for the CAM cost increase, but you can modify the letter for different situations. But first show the letter to your attorney. [Insert date] Dear John Tenant: Due to a drastic increase in the amount of snowfall this past winter, we incurred snow removal costs that were much higher than we initially budgeted for when we calculated this year’s CAM costs. We are sure you realize how important snow removal is for our center—without plowing, snowbanks reduce the number of parking spaces available and provide ample opportunity for shoppers to slip and fall. In the interests of making our monthly CAM cost billing as accurate as possible, we must adjust your CAM cost payments to reflect this increased cost, as permitted under section 3.14 of your lease. The total amount of the additional snow removal costs is $[insert amount], while the budgeted amount was only $[insert amount]. That is a shortfall of $[insert amount]. Your pro rata share of that amount is $[insert amount]. Because there are only [insert #] months left in the fiscal year, you are required to pay an additional $[insert amount] per month for the remainder of the fiscal year, for a total monthly CAM cost payment of $[insert amount]. Although we could have waited until the end of the fiscal year and required you to pay a lump sum during the reconciliation process, as provided for in section 3.15 of your lease, this could have created cash flow problems for some tenants. We would have liked to include this additional cost in our initial CAM cost budget estimate at the beginning of the year, but the need for additional snow removal services was unexpected. The additional amount due will be reflected in the monthly bill for [insert month] and in each subsequent bill for the balance of the fiscal year. Please let us know if you have any questions. Yours truly, Joan Manager COMPLETE GUIDE TO SHOPPING CENTER MANAGEMENT 201

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