Pass Disaster Costs Through to Tenants

Disasters have always affected commercial owners who must deal with property damage caused by snowstorms, hurricanes, fires, and floods. Passing disaster-related expenses through to tenants in common area maintenance (CAM) charges can lower your repair bills and boost your bottom line after your shopping center or office building has been damaged. Negotiate with your tenant to obligate it to pay for at least some of the cost of rehabilitating your property.

Ask for All Reasonable Charges

Owners generally try to include as many expenses as they can in CAM charges, so it's common during lease negotiations for owners to present tenants with an exhaustive list of all of the things they want the tenant to pay for. Along with smaller charges for routine maintenance, owners typically want tenants to contribute their proportionate share of potentially expensive charges like replacement costs, administrative fees, and legal bills.

Tenants usually try to pare down the list, refusing to pay for certain things that don't apply to them, such as the legal costs of enforcing a lease against another tenant. Or a tenant may agree to a certain type of charge but set a cutoff for the specific items that charge will extend to. For example, the tenant may agree that the onsite property manager's salary be included as a CAM charge—but not the salaries of employees in the owner's main office.

If in addition to CAM charges for normal maintenance and repairs, the cost of day-to-day operations, and administrative fees, you want to require tenants to pay a portion of disaster-related costs, ask the tenant to agree to one of two options that will make those contributions a part of their CAM charges.

Option #1: Amortize major replacement costs. If you try to obligate your tenants to pay for “capital improvements—major items, such as a new roof or resurfaced parking field—they may balk, arguing that capital improvements are unrelated to maintaining the common areas, so they shouldn't be included in CAM charges. If you explain that it's impossible to continue putting a bandage over an item that needs to be replaced, your tenants may agree to be charged for a capital improvement on an amortized basis, meaning they would pay for a proportionate share of the new item “over its useful life” as part of their CAM charges. That way, you can still pass through a portion of the cost of a capital improvement that you may otherwise struggle to pay for.

When you're negotiating a tenant's obligation to help you pay for capital improvements, try to include items that need to be replaced because of disaster-related damage. But be prepared for it to argue that the insurance charge included in its CAM costs already covers that type of damage, which you can address with Option #2.

Option #2: Include deductible in CAM costs. Tenants usually negotiate to exclude from CAM costs charges to fix or replace large items that generally are insurable from fire and casualty damage or other disasters. If you can't convince your tenants to pay for the whole cost of insurable items, it's important to negotiate the payment of any deductibles you have on your policies.

“The issue is whether the owner can pass through as a CAM cost at least part of the cost of the insurance deductible,” says Ohio commercial real estate attorney Abraham Lieberman. “Tenants argue that if they are already paying for a portion of the property's insurance premiums in their CAM costs, it's the owner's responsibility to make sure that the insurance is adequate,” says Lieberman, an Insider board member.

“But some owners feel that if they're charging tenants less for insurance because their premiums are lower with a deductible, they should at least be able to somehow include the deductible in CAM costs,” he notes.

You can try to argue that if you had chosen a zero deductible for your insurance policy, the tenant's proportionate share of the premium that it must pay as CAM charges would be higher, so you should at least be able to recoup a portion of the deductible that decreased the premium. Whether you'll be successful depends on how strong the tenant is, but it's worth discussing defraying the cost of disaster-related repairs and replacements.

Make “Consistency” Part of Strategy

Because many tenants ask for exceptions to their owners' policies, it's important to have a strategy for addressing these requests before you begin negotiations—especially when each party's responsibility for big-ticket items like disaster-related costs is at stake.

If you have a consistent track record of requiring tenants to help pay for casualties with CAM costs, use that as your strategy when asking a new tenant to do the same. “Consistency is the strongest strategy you can have,” says Lieberman. “If you can show the prospective tenant that your current tenants have agreed to—and you've enforced—this requirement, it will support your argument that you can't make exceptions,” he says. Use the fact that making exceptions for some tenants and not others can complicate CAM charges administration—leading to higher administrative costs and more errors—as a bargaining chip in your favor.

Tenants will always try to negotiate at least some of the owner's requests out of the final lease, so if you don't ask for what you want, you definitely won't get it—and you may be disappointed later. “If you want what you consider to be a fair lease, it makes sense to at least ask for everything you can upfront so that you and the tenant can work through the requests,” Lieberman points out.

PRACTICAL POINTER: As far as administrating all of the CAM charges that you and the tenant have agreed to during negotiations, it's very important to stick to the terms exactly—even when you have a chance to do something that isn't provided for under the lease, warns Lieberman. “It never leads to good landlord-tenant relations when the owner tries to sneak something in that isn't allowed by the lease,” he says. “Once you've agreed to what it is that you can include or not include in the CAM charges, I think it behooves everybody to play it straight,” he adds.

Insider Source

Abraham Lieberman, Esq.: Stumphauzer O'Toole, 5455 Detroit Rd., Sheffield Village, OH 44054; (440) 930-4001; alieberman@sheffieldlaw.com.

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