Collect CAM/Operating Cost Increases During Year

Hurricane Ike's push into Texas, home of nearly one quarter of the nation's refining capacity, had a significant impact on gas prices across the nation. Several states, many of which were not in the tropical storm's path, saw gas prices that surpassed the $4 a gallon mark, with some consumers paying as much as $5.09 per gallon.

The damage to the refineries may not have been as extensive as expected, but it's a sure bet that the cost of heating oil will be up this winter. This means that you'll probably be facing unexpected increases in operating expenses that you didn't factor into your tenants' original rent estimate. And if your lease says that you have to wait until the end of the year to bill tenants for those unexpected increases, you'll be at a disadvantage, as you'll more than likely have to cover the increases out of your own pocket.

To avoid this problem, give yourself the right in the lease to increase the amount of your tenant's monthly estimated CAM cost or operating expense payments during the year, says New Jersey attorney Marc L. Ripp. By exercising this right, you won't have to wait until the end of the year to get the money that you've laid out for CAM cost increases. And if the tenant goes bankrupt, you'll lose less money, because you've collected increases as they occurred.

How to Revise Monthly Payments

If you're in a strong bargaining position, take an aggressive approach that gives you the right to revise the monthly estimated CAM costs or operating expenses at any time to cover the extra costs, says Ripp.

Add the following language to your lease where it covers monthly estimated CAM costs or operating expense payments:

Model Lease Language

Landlord may, at any time, and from time to time, revise the amount due as its Monthly [CAM Cost/Operating Expense] Payment to cover any increase not previously factored into the Annual [CAM Cost/Operating Expense] Estimate. Upon tenant's receipt of a revision to its Monthly [CAM Cost/Operating Expense] Payment, Tenant shall pay Landlord, as Additional Rent, the revised amount.

A strong tenant may argue that it can't project its own expenses for cash flow purposes if you have the right to revise at any time. And if you are like most owners in today's economy, you're probably experiencing high vacancy rates and tenant bankruptcies, which means that you may have to compromise. If that's the case, you can offer to limit your right to revise the monthly CAM cost or operating expense payments by using one of the following options:

Option 1: Cap monthly payment increase. Place a cap on the amount that you can increase the monthly payment. The lease would say that the monthly payment can't increase by more than a set percentage of the annual CAM costs or operating expense estimate. This limit doesn't affect how often you can increase the monthly payments, just the size of the payments.

Example: The annual CAM costs and operating expense estimate is $12,000. Each monthly payment is then one-twelfth of $12,000—or $1,000. You and the tenant agree that no revised monthly payment can be more than the original monthly payment plus 5 percent of the annual estimate of $12,000 ($600). The maximum monthly payment is $1,600 ($1,000 + $600).

Option 2: Cap total annual increase. Set an annual cumulative cap—that is, all monthly payment increases in a given year can't total more than a set percentage of the annual CAM cost or operating expense estimate for that year. You can increase the monthly payments as often as you need to by as much as you need to, as long as the annual cap isn't exceeded.

Example: The annual CAM cost and operating expense estimate is $12,000, and each monthly payment is $1,000. You and the tenant agree that the total increase in the revised monthly payments can't exceed 10 percent of the annual estimate of $12,000—or $1,200.

You charge the tenant $1,000 from January to June but increase the July payment to $1,500 and the August payment to $1,700 because of drastic increases in utility costs. Since you've reached the $1,200 cumulative cap in the August payment, you can't charge the tenant more than $1,000 a month for the rest of the year.

Practical Pointer: The caps in Options #1 and #2 limit only the amount of the monthly payments of estimated costs, but not the actual costs determined at the year-end reconciliation, says Ripp. The tenant still owes you the difference between the actual costs and the estimated amount it paid during the year.

Option 3: Limit the number of increases. For example, allow no more than two revised monthly payments per year.

If you and the tenant agree to one or a combination of these compromises, add the following language at the end of the Model Lease Language given above:

Model Lease Language

…provided, however, that

[choose one or more of the following options:]

[Option 1]

the increase in any revised Monthly [CAM Cost/Operating Expense] payment shall not exceed more than [insert %] of such year's Annual [CAM Cost/Operating Expense] Estimate.

[Option 2]

the aggregate increase in the revised Monthly [CAM Cost/Operating Expense] Payments per fiscal year shall not exceed more than [insert %] of such year's Annual [CAM Cost/Operating Expense] Estimate.

[Option 3]

there shall be no more than [insert #, e.g., 2] revised Monthly [CAM Cost/Operating Expense] Payments per [fiscal/calendar] year.

Insider Source

Marc. L. Ripp, Esq.: Sr. Assoc. General Counsel, Mack-Cali Realty Corp., Mack-Cali Centre II, 650 From Rd., Ste. 220, Paramus, NJ 07652-3517; (201) 967-0324; mripp@mack-cali.com.

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