5 Things Franchise Tenants Need to Know About Common Area Maintenance Charges
In our experience as The Lease Coach, wehave met many tenants (both franchisees and independent business owners alike) whohave questions and/or concerns about Common Area Maintenance charges (otherwiseknown as CAM costs or Operating Costs). Considering the importance (and potentialimpact) of these charges, we have devoted a great deal of attention to thematter in our new book, NegotiatingCommercial Leases & Renewals For Dummies. Here are just a few thingsyou will need to know:
ClassifyCommon Area: Common area is the area of abuilding used by all tenants and their customers. Examples of common areainclude lobbies, corridors and restrooms. Parking facilities, malls, sidewalks,landscaped areas, public toilets and truck and service facilities may beincluded as common areas when calculating the tenant’s share of buildingOperating Expenses.
Negotiatethe Operating Costs as Rent: You may well hear frommost commercial real estate professionals that Operating Costs are notnegotiable; there are, however, aspects of Operating Costs that can indeed bechanged to the tenant’s favour. The landlord wants to make sure that thetenants pay for all the Operating Costs for the property. There’s nothingunusual about that. But when The Lease Coach analyzes Operating Costs forgroups of tenants in a building, we frequently find that the tenants aresubsidizing capital improvements that the landlord is using to enhance orincrease the building’s value. Negotiating to cap increases to certain costs orexcluding certain items from Operating Costs can help keep these in check.
Lookat What You’re Paying For: The majority of commerciallease agreements may stipulate the specific components of the Operating Coststhat the tenants need to pay for. Typical examples include general maintenance,painting, lawn cutting, snow removal, property insurance and so on. Almostevery lease agreement has an Operating Cost clause and typically defines theseCommon Area Maintenance charges in a short – or long-form manner. From atenant’s perspective, longer is better because it creates certainty.
Understandwhy Proportionate Share Counts: If a tenantoccupies seven percent of a commercial property, they can typically be requiredto pay seven percent – their proportionate share – of the Operating Costs asadditional rent. But not all tenants used Operating Costs proportionately. Forexample, who would use more water, a hair salon or a gift store? Have yourproportionate share of the CAM costs (as a percentage number) actually statedin the lease agreement. And don’t be afraid to question or dispute theOperating Costs and your proportionate share.
Communicatewith Your Landlord about CAM Concerns: Operatingcost discrepancies come in two flavors: honest mistakes or dishonest(deliberate, negligent or fraudulent) calculations. In a building where theproperty is fully or close to fully occupied, the landlord may have less reasonto try to profit from Operating Costs but may still try to enhance the propertywith the tenant’s money. However, when a property has several vacancies, thelandlord may want to avoid paying his proportionate share of Operating Costsfor the vacant units. Therefore, the landlord may put language into the leaseagreement stating that the Operating Costs will be calculated as if theproperty is 95 – 100% fully leased or occupied, whether it is or not.Communicating with your landlord both verbally and in writing about anyOperating Cost concerns you may have is imperative. And don’t wait too longbecause the lease may stipulate a statute of limitations on adjustments.
For a copy of our free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail yourrequest to DaleWillerton@TheLeaseCoach.com.Dale Willerton and Jeff Grandfield - The Lease Coach are CommercialLease Consultants who work exclusively for tenants. Dale and Jeff areprofessional speakers and co-authors of Negotiating Commercial Leases &Renewals For Dummies (Wiley, 2013). Got a leasing question? Need help with yournew lease or renewal? Call 1-800-738-9202, e-mailDaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.
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