Sure, you have a budget or estimate of what you expect your occupancy cost to be, but what can you be missing that may impact your actual occupancy cost? The list of expenses included in calculating occupancy cost is long and can include many unexpected or unforeseen items. Having an in-depth understanding of what the lease language includes, and doesn’t include, will help you understand the potential exposure you have related to occupancy cost. Lease language will have a big impact on whether certain expenses are the responsibility of the tenant or landlord, and although the language is typically clear, there will still be grey areas where it’s not so black and white. A seasoned tenant rep will be able to help validate occupancy cost budgets and forewarn of risks involved with certain lease language. With the plethora of different expenses included in your overall occupancy cost, it can be easy to miss or overlook some of these expenses.
Common area maintenance expenses, commonly referred to as CAM expenses, are typically paid for by the property owner or landlord and billed back to individual tenants through a monthly payment based on their pro-rata share of a CAM budget. These monthly payments are ultimately reconciled at the end of the year and if the CAM budget was underestimated or missing certain items, the actual expense can be quite higher than expected. Although CAM expenses are described in a lease document, it does not mean it’s clear on how much will be paid towards CAM. First-year CAM payments are usually an estimate based on a proposed estimated budget or actual expenses from the previous year. Neither one of these amounts may be an accurate representation of the actual CAM amount for any given year. Some leases may include a CAM cap where the tenant has a cap on the total amount they are required to pay, ultimately leaving any expenses above that amount the responsibility of the property owner or landlord. A CAM cap can be set at a fixed amount or based off a percentage increase over the actual CAM expense from the previous year. Monetary donations to political or charitable organizations are sometimes passed through as CAM expenses to tenants. This could be a grey area and may not actually be reimbursable items depending on the lease language. A tenant may also have the right to audit or protest CAM reconciliations and can withhold payment for any expenses they feel is not allowable per the lease agreement. This can result in unforeseen legal fees, not to mention lost time and the potential for non-payment.
When it comes to repairs, it is usually pretty clear what falls on the property owner or landlord and what falls on the tenant, but again there can be a lot of room for dispute. If it is not specifically listed as a landlord responsibility it usually means it ends up having to be repaired at the expense of the tenant, but if the tenant objects or delays repair that ultimately creates additional damage, the costs can escalate for both the tenant and property owner or landlord and unforeseen legal fees may be incurred. A delay in a tenant making necessary repairs could also impact adjacent tenants to the extent they seek financial reimbursement and even a minor issue can snowball into a very costly scenario.
Fees and Other Expenses
The payment of fees will affect overall occupancy cost. Property owners or landlords typically have the right, per the lease agreement, to charge certain fees to tenants. These fees may include management fees, administration fees, late fees, maintenance fees, amongst others. The property owner or landlord may incur direct fees itself including late fees, false (fire) alarm fees or non-compliance fees imposed by the city and these fees may not be reimbursable through CAM and will ultimately be an additional, unforeseen expense. Special assessments may be imposed from time to time and will also affect occupancy cost.
Other expenses that can be commonly overlooked include the cost of contracts or inspections required to keep the property operating legally and in compliance with the law. Depending on use, you may be required to have routine inspections done on equipment and be required to have certain monitoring or alarm contracts that can also add to your overall occupancy cost.
Utility expenses may vary especially if you have a water main break inside your property limits that results in very costly repairs and an unusually high water bill. These repairs may fall outside what tenants are required to pay for through CAM and can significantly increase occupancy cost.
Taxes and Insurance
Taxes and insurance can fluctuate from year to year and these expenses will also impact occupancy cost. There can be a lot of grey areas regarding both taxes and insurance and determining the actual legitimate reimbursable amount may be hard to determine if the lease language is vague. A smart tenant will want to make sure the landlord is not including expenses related to items that are not specific to the general operation of the property and that insurance premiums are not influenced by their negligence at any other properties the landlord may control.
It can be challenging to accurately predict actual occupancy cost, even with a fixed rent and fixed CAM many unforeseen expenses can arise. It’s best to play the ‘worst-case scenario’ game so you know the financial risks involved in what could be unforeseen expenses that affect actual occupancy cost. It’s wise to account for the time and resources that may be needed to resolve certain unforeseen issues that may arise at any given property. There will always be something that gets overlooked or is unexpected, but the more you can take a step back and look at the big picture and role-play any scenario the better off you will be in predicting what could be your actual occupancy cost.