Are CAM allocations adjusted when there is a vacancy?

Question

Say there is a 4 unit property where each unit is the same size. 3 of the 4 units are occupied the entire year and the remaining unit is vacant the entire year. Total CAM charges are $100,000. Is the proper allocation of these costs $25,000 per unit since each unit makes up 25% of the gross leasable area and the owner is not able to recoup the 25% from the vacant unit? This is my guess but I recently saw a prior year allocation from a prior owner that essentially would have charged each of the occupied units $33,333 since they each benefited from 33.33% of the total amount spent on CAMs. Clearly, this owner was trying to recoup 100% of the amount spent but I believe any sophisticated tenant would not have agreed to pay more than their allocation of the GLA. I saw no language in the lease that says lessees had to cover unallocated expenses for vacant units. I believe vacancy costs are covered by ownership but perhaps this isn't common?

Joel Owens · Answer

With retail you have mom and pop, regional, and national tenants.

Often mom and pop tenants can't afford attorney representation so try to do things on their own to negotiate a lease.

Owners could try to write anything into a lease but doesn't not mean it is legal or enforceable. Many tenants do not know that however so they tend to go along with what they signed. It is like the stickers you see on trucks that say not responsible for rocks etc. hitting other vehicles. Some people believe since a sticker says it is so then it must be true.

No way I have seen tenants pay anything but the share of the space they occupy for costs. Even then there are controllable and non-controllable expenses and cam caps that can be cumulative or non-cumulative in nature.

It works the same way for my clients when we look at a retail center to buy. If mom and pop tenants are paying above market rent because landlord did not want to give TI and they do not disclose sales with weak guarantee on the lease and sweetheart terms then it's a bad deal for us even if area has high demo's for income and population levels etc. I like deals when we buy where the leases are very landlord friendly of course! lol  If someone is a tenant rep broker they might have a different view............... : )

I find some developers build cheap boxes and backfill with crappy tenants and leases and then try to sell it off as a gem to an unsophisticated buyer. I keep those developers on my black mark list and avoid them as much as possible unless they have a rare incredible property and tenants. I have other developers  that build high quality and are very thoughtful and methodical about the type of tenants they put into a retail center. They will take multiple LOI's and wait for the right tenant mix for the center and get landlord friendly leases signed.

Greg Dickerson · Answer

@Jason Conroy it all depends on how it is spelled out in the lease. I have never seen charges for vacant units allocated among the other tenants but a landlord could write it in that way. Bottom line is make sure you study your lease very carefully as there are no “rules” when it comes to commercial leases.

Jeff S. · Answer

I have absolutely seen this.  Lease was the most aggressive, landlord friendly document I’d ever seen (at a property that happened to be in Redondo Beach, @Jason Conroy).  It stated in effect, that CAMs would be prorated over the then leased area, not the percentage of GLA that our unit represented.  Nor was there any limit on the CAMs or annual CAM increases.  Crazy.

Fortunately, my attorney caught this, and we negotiated it out.  It made us read, reread, and then double check all the other lease terms.  We would do this anyway, but with a more critical and suspicious eye, in this case.  I’ll add that just the attitude the lease implied toward the tenants almost caused us to throw our hands up and walk.

Interesting that we were among the first tenants and it took a while to fill the relatively large shopping center. Naturally, a recession hit, just after we moved in and landlord went BK.  Could you imagine if just a few small tenants had to pay the expenses of the then empty drug store and a supermarket?  One lesson learned was not to move into new construction if we could help it.  We want to see a track record.

Phil Christian · Answer

Depends.  Is there a gross up provision in the lease?  Class A & B office leases are structured with a 95% occupancy gross up provision which allows the LL to pass through variable costs to the Tenant as if the project is 95% occupied.

Ronald Rohde · Answer

Review the lease, even if its written as 25%, landlords may provide shady accounting. Always know your rights and double check the numbers.

Paul Cattin · Answer

Most likely not. Tenants would pay their pro rata share of the expenses regardless. Any vacancy would add this cost to operating.

Jessica Zolotorofe · Answer

No, the landlord picks up the vacant space.

Kevin K. · Answer

As the other’s have stated it should be outlined in the lease what the tenants pro-rata share is I.e. 2500/sf space out of a 10,000/sf shopping center should be 25% of CAM. It should also outline what is included in CAM. If the above is true what happens when it’s 50% occupied? The remaining two tenants pay 50% each? That’s not very fair for the remaining tenants. Also, make sure CAM charges are not only being billed but also collected.

Jason Conroy · Answer

No gross up language.  Probably just a shady or unknowledgeable owner.

Jason Conroy · Answer

Yes, that has always been my understanding also.  I think this guy may have been taking advantage of his tenants.

Are CAM allocations adjusted when there is a vacancy?

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