By Beth Mattson-Teig – Franchise Times
Franchisees who want to reign in rising common area maintenance (CAM) costs may have an uphill battle.
CAM costs are under tremendous pressure in the wake of increasing insurance, security and energy costs. At the same time, retail sales are getting squeezed in the current economy.
“Operating expenses are going up, and the sales at a lot of tenants are not going up enough to offset these higher costs,” said Scott Shillings, senior vice president at Staubach Retail in Houston.
Once unique to mall properties, CAM charges are now surfacing in a wide variety of retail properties ranging from neighborhood centers to lifestyle centers. CAM charges vary depending on the property owner. Some landlords will offload as many costs as they can into CAM charges.
CAM and other operating costs such as insurance and taxes can account for as much as one-third to one-half of a tenant’s total occupancy cost. That can translate into tens of thousands of dollars in monthly charges for some retail and restaurant tenants. “It is definitely worth a tenant’s time to pay attention to CAM during the lease negotiation and review those year-end statements,” says Nancy Davids, a director at Goulston & Storrs, a Boston-based law firm.
The best way to minimize those charges is to negotiate terms before a lease is signed. Hiring a good broker or attorney who understands CAM expenses is a good first step. It also is important for a tenant or their representative to do their homework. Compare CAM costs of the potential property to similar properties in the market. Ask the landlord to provide a breakdown of CAM and insurance charges during lease negotiation, so it is clear what is included. In addition, look at the recent history of CAM expenses to see if there has been a spike and what caused it.
It is important to invest the time at the front-end of a lease negotiation to not only understand CAM charges at a property, but also to try to negotiate exclusions or the right to audit an owner’s CAM spending, Shillings says. CAM charges are actually extremely negotiable. Tenants have more control of what is or is not included in their CAM charges depending on how badly the landlord wants them as a tenant, he adds.
Fixed vs. pro-rata costs
Landlords charge CAM expenses one of two ways – on a fixed or flat rate or on a pro rata basis. The pro-rata charges require a tenant to pay a portion of the property’s annual operating expenses, depending on the amount of space they lease.
Many shopping-center owners have switched to fixed rate CAM charges with minor annual increases built into the lease for inflation. “The good news from a tenant’s perspective is that the cost is known, and so the tenant won’t see a sudden spike from one year to the next,” Davids says. The downside for landlords is they can’t pass through sizable increases to tenants, such as a sudden spike in fuel costs.
One reason landlords went to a fixed CAM basis is because they were tired of the administrative drain due to tenant audits of their CAM costs. However, there are still some shopping centers that charge CAM on a pro-rata share. In those cases, tenants should negotiate a cap to make sure that they don’t see a dramatic year-over-year increase.
The best advice for tenants considering a lease in a pro-rata center is to look closely at what is included and what is excluded as part of CAM.
Keeping costs down
Landlords are working to keep those CAM costs down. Not only do owners face pressure to keep rates down, but owners operating on a fixed rate system are forced to hold increases to a minimum or else pay the higher costs out of pocket.
“CAM has not gone up a lot at our centers, because we have tried to combat all of the increases with ways to decrease those costs,” says Larry Jensen, executive vice president and director of client relationships for Jones Lang LaSalle Retail. Despite significant pressure on CAM in recent years, Jones Lang LaSalle has held its CAM increases to about 3 percent per year.
Landlords are doing everything from turning down the thermostat to utilizing timer switches on lighting systems and putting more water-efficient flush valves in restroom toilets.
Landlords are getting creative in their operations as they look for new ways to reduce costs. For example, Jones Lang LaSalle has switched its security parking lot patrols from gas guzzling SUVs to bikes and electric golf carts at some properties. Even small changes such as turning escalators on a little later or shutting them off a little earlier can translate into significant savings.
Ultimately, owners are trying to stretch their resources and keep costs down, while still maintaining the level of service that tenants and customers demand. Everything is being scrutinized, and oftentimes changes are made throughout the year to reflect changes at the center in terms of traffic or weather.