New CAM expense to NNN tenants

Indianapolis, Indiana
Managing Your Property
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New CAM expense to NNN tenants

Chet Cromer
Member since 2023 · 1 post · 0 votes

New CRE owner here. One year into owning a 6 year old 8000 sf flex space that my main business leases 1/3 of with 2 other tenants.

All NNN leases and predictable CAM except this past year we had to reseal and stripe the parking lot for the first time. I envision this to be part of CAM. Would you work it into a one time reconciliation at end of year (lease says we can) or spread it out over 3-4 years to reduce impact and ups and downs of lease payments?

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Chet Cromer
Member since 2023 · 1 post · 1 vote
2y

The lease contracts say there is an annual reconciliation and we can collect any underpaid CAM expenses (or refund any overages).

We communicated with tenants about the project, but not enough in writing and to the point that I would not expect any surprises. I think as an act of good will, we will give them the offer to pay the cost up front (and maybe offer a 10% discount if the do as we didn't fully prepare them for the expense), or spread the cost over the upcoming year (or the remainder of their lease term, as one has the end (hopefully a renewal) coming up late next year).

I love the idea of sharing the capital improvements plan with tenants - knowing this is an every 4-5 year thing, knowing we may have another project coming up, etc. etc. It's still a relatively new building so has little problems, but this is a great idea.

Communication communication communication. I let it slip through the cracks a little on this in terms of the difficult part of the discussion. Lesson being learned.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y
    Quote from @Chet Cromer:

    New CRE owner here. One year into owning a 6 year old 8000 sf flex space that my main business leases 1/3 of with 2 other tenants.

    All NNN leases and predictable CAM except this past year we had to reseal and stripe the parking lot for the first time. I envision this to be part of CAM. Would you work it into a one time reconciliation at end of year (lease says we can) or spread it out over 3-4 years to reduce impact and ups and downs of lease payments?


     How was this noted to the tenants? Do you have a capital improvements plan provided to them in advance? 

    Was the cost discussed with them at all?

    Typically we would provide a five year capital improvement plan with estimated cost for these one off expenditures. If this was not done, it may upset the tenants. With that plan, its part of CAM in that year or following year. 

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  • Aamir V.
    Investor · Houston, TX · Member since 2018 · 25 posts · 5 votes
    2y

    It really depends on what the lease language says... and then how you would like to approach it.

    I've seen both.  The one year big jump, which may cause some angst among tenants.  It may be too late, but the thing to do here is communicate early, communicate often, and make sure they know it's coming.  Also, this is something you often do on a schedule (like you make it part of your X-year maintenance cycle), and you could just say that to tenants...

    Which relates to the other thing you do, which is spread it over the X years, and just tell the tenants that it's part of CAM even when they sign.  If you don't do that, then what happens when a tenant leaves in the middle of a cycle, you know?

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  • Chet Cromer
    Member since 2023 · 1 post · 1 vote
    2y

    The lease contracts say there is an annual reconciliation and we can collect any underpaid CAM expenses (or refund any overages).

    We communicated with tenants about the project, but not enough in writing and to the point that I would not expect any surprises. I think as an act of good will, we will give them the offer to pay the cost up front (and maybe offer a 10% discount if the do as we didn't fully prepare them for the expense), or spread the cost over the upcoming year (or the remainder of their lease term, as one has the end (hopefully a renewal) coming up late next year).

    I love the idea of sharing the capital improvements plan with tenants - knowing this is an every 4-5 year thing, knowing we may have another project coming up, etc. etc. It's still a relatively new building so has little problems, but this is a great idea.

    Communication communication communication. I let it slip through the cracks a little on this in terms of the difficult part of the discussion. Lesson being learned.

    1Reply
  • Milivoje Simonovic
    Member since 2026 · 11 posts · 0 votes
    3d

    Good idea to split it with the discount because that usually keeps tenants on your side. I keep a running per tenant CAM summary through the year so surprises do not sneak up much. I built a calculator for the CAM summary if that is useful, to you too.

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