Who Pays For What?

Who Pays For What? Strategically Drafting and Reviewing Business Expenses and Common Area Maintenance Costs In Commercial Leases


DICTA Magazine


Author( s) Grant T. Williamson


Business expenses (" OpEx") and common location maintenance costs (" CAM") are 2 important products in any commercial lease, but they are
typically overlooked after the choice is made on how to break up these costs. Typically, operating expenditures are computed and assigned based upon a gross, customized gross, or triple net basis, with the renter being accountable for a portion of CAM based upon the portion of the overall residential or commercial property they occupy. The proprietor will usually have basic lease language for each kind of OpEx structure (i.e., gross, modified gross, or triple net) and for CAM breakdowns. Once the proprietor and tenant agree that, for example, the lease will be determined on a triple net basis with renter accountable for its proportional share of CAM, let's state 20% for sake of illustration, property owner's counsel will generally simply pull basic OpEx and CAM language from its term bank and stop. On the other side of the table, tenant's counsel will frequently fall under the trap of just making sure that the OpEx arrangement ponders a triple net structure and that the CAM breakdown properly lists 20%. But taking this narrow approach to drafting and examining OpEx and CAM expenses in industrial leases can open a pandora's box of problems down the road as costs begin to develop during the course of the leasing relationship and celebrations start to second-guess who should be
paying for what.


It is handy to define the OpEx structures mentioned above and to provide more information on CAM expenses. OpEx, in some cases referred to as
additional lease, is indicated to normally describe all expenditures associated with a lease beyond the base lease being charged. Freedom of agreement permits the celebrations to choose how to break down OpEx, and the classifications of gross leases, customized gross leases, and triple net leases are the three methods that can be made use of.


In a gross lease, the base rent is all that the renter will pay. The base lease will be higher than the base rent under a modified gross lease or a triple net lease since the proprietor is spending for all additional lease itself and has (ideally properly) calculated these expenses into one overall base rent rate that will enable the property manager to cover these costs and realize an earnings on the lease of its space.


A customized gross lease resembles a gross lease because the base lease reflects a few of the awaited costs of extra lease products but differs in that a few of the typical extra lease products will be paid straight by the tenant. As such, the base lease rate under a customized gross lease will be less than under a gross lease and more than under a triple net lease. For example, a customized gross lease may offer that the base rent rate includes the costs of specific utilities, which property owner will pay directly, however not others, for which obligation will fall on the occupant to pay straight.


A triple net lease will have the most affordable rent rate of all since it expects that tenant will be accountable for all other expenses related to the lease and its operations thereunder. CAM, in other words, will encompass costs associated with locations that tenant has access to, and rights to use, in common with other occupants at a residential or . These can vary commonly depending upon the kind of residential or commercial property, however typically consist of several of the following: parking lots or decks, shared corridors, public bathrooms, expenses connected with landscaping at the residential or commercial property, and costs associated with maintaining the residential or commercial property (but not associated with keeping any facilities specifically occupied by any renter of the residential or commercial property).


As you might have the ability to inform by these meanings, "costs" and "extra rent" and "common area" and "business expenses" are broad terms that might lend themselves to incorporating, or not encompassing, all manner of various items under a lease. The last thing either party wants is for an expense that they are accountable for to come as a surprise, particularly in longer-term commercial leases. As such, whether you are drafting a lease for a property manager or evaluating a lease for an occupant, it is important to ask the following concerns of your client:


- Can you note out all the expenditures that you anticipate to be responsible for paying directly? Are there any expenditures that you specifically do not anticipate to spend for?
- If the lease structure is not gross, what utilities will the occupant be accountable for paying (e.g., water, gas, drain, electrical, telephone, and/or web)? Are there expense savings associated, for instance, with the property owner obtaining utilities for the entire residential or commercial property and then billing them back to tenant for repayment or through separately metering the occupant's premises to precisely divide costs, or is it more expense effective for the tenant to agreement for and spend for utilities directly? Will utility expenses be involved the meaning of CAM?
- How will OpEx and CAM costs be evaluated: On a monthly basis per a set quote? On a per square foot basis? Based upon actual expenditures incurred and then billed back to the tenant for repayment? If these expenses are not billed back for reimbursement, how will approximated OpEx and CAM expenses be reconciled and changed: On a yearly basis? On a month-by-month case?
- For property owners, will there be an associated supervisor entity carrying out services for the residential or commercial property whose fees should be recouped either through OpEx or CAM expenses? For renters, should management costs be excluded or topped?
- For tenants, based on previous time in a building and relationship with the property manager, is it worth attempting to press for a cap on OpEx and CAM boost year by year (e.g., inserting language that occupant shall not be accountable for the payment of any OpEx and CAM expenses to the degree that they surpass X% of such costs for the immediately preceding lease year) to ensure that proprietor is incentivized to keep costs reasonable and also not to utilize the residential or commercial property as a revenue center? For property owners, has enough financial analysis been carried out to devote to a cap without the threat of eating excess costs down the roadway?
- How will capital improvement costs be spent for? Will they be amortized over a certain period of time, which is more common under a long-term lease or for a big, anchor renter, or will property owner eat these costs (which they may not wish to do if they just have a leasehold interest in the residential or commercial property)?


At the end of the day, clearness is crucial when it pertains to drafting and revising OpEx and CAM provisions in industrial leases. While it can
appear tiresome to particularly consist of or leave out particular items instead of just adding a note that the lease is, for example, a triple net lease and that renter's share of CAM is 20%, making the effort to totally understand who should spend for what will help avoid conflicts down the road and keep your client happy.


Republished with permission. This post was released in the Knoxville Bar Association's monthly publication DICTA, January 2023, Volume 51, Issue 1.