With 2021 around the corner, commercial property owners have begun sending tenants updated operating expense charges for the new year (“CAM charges”). What many tenants are finding very surprising is that in a time when they need to cut back on expenses to get through the COVID-19 recession, their landlords and property managers seem to be going in the other direction and unaware of the role they play to their tenants’ bottom line.
Under normal circumstances and looking at historical price index adjustments, one would expect to see CAM charges increase 2-4%. Unfortunately, with a few exceptions, the increases we have been seeing passed onto our clients have been in the 5-10% range.
So how is a 5-10% increase possible in these times? The problem is the property managers that prepare budgets for commercial real estate typically focus on their landlord’s bottom line and give little thought to the increase being passed onto their tenants. The nature of commercial real estate leases allows for much of the increase to be passed onto the tenant, thus giving the landlord a blank check to maintain their asset with little impact to their bottom line. This impact is consistent whether a tenant has a “Base Year” or a triple net (“NNN”) lease.
What Tenants Can Do to Protect Themselves
For tenants, they must review and challenge increases that do not seem reasonable. Unfortunately, the presentation of expenses does not always make it easy to identify the cause of increases without some effort and knowledge of commercial real estate. Turning to a third-party consultant like National Lease Advisors for a lease audit can help overcome this roadblock.
At National Lease Advisors, we will review hundreds of CAM statements for our clients this year and save them a significant amount of money by finding erroneous charges that the lease does not permit.
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Understanding the Review Process
At National Lease Advisors, we can complete a complimentary CAM review with just the lease document and the most recent CAM statements received from the landlord. The landlord is not involved in this stage. It is here that we can provide a tenant peace of mind that the charges are reasonable or share concerns that may merit further investigation.
If red flags are raised, and the tenants feels they are material enough for further investigation, our team reaches out to your landlord to inquire about the charges in question. This stage is not threatening to the landlord, but simply an opportunity to ask questions or highlight what we believe may be inconsistent with the lease.
Depending the amount required for the landlord to respond and understand our concerns, the total process could take as little as a week, or a few months.
Don’t Worry About Rocking the Boat
Some tenants may be concerned that an inquiry or lease audit, especially by a third-party consultant, will negatively impact their relationship with the landlord. This could be the case if an auditor is selected that puts their interests over the tenant. At National Lease Advisors, our auditors come from the landlord side of the table and understand how to deal with property managers in a fair and balanced manner. We also know when an expense is reasonable or unreasonable, so we avoid challenging charges that are unlikely to provide our clients with savings.
Don’t Let Lease Audit Provisions (or a lack thereof) Hold You Back
Many tenants mistakenly believe they do not have the right to question landlord charges unless they exercise the lease audit right under a lease. Even worse, tenants without lease audit rights assume they have no path to investigate.
At National Lease Advisors, we rarely trigger the lease audit provisions of the lease. Instead, we act as advisors for our clients and inquire to the landlord on their behalf to ask the right questions. The fact is that 95% of mistakes result from the landlord not accounting per industry standards, not honoring the provisions of the lease, or simply human error.
Having reviewed and “audited” CAM charges for over a decade, I can assure you that the lease audit language provided under the lease does little for the tenant and is there to protect the landlord. From limited windows to exercise these rights, or the need to hire a national accounting firm (most of whom don’t even provide lease audits), the language is a fear tactic intended to prevent tenants from rightly investigating the validity of the charges.
Contingency Fee Restrictions
Many tenants may hesitate to hire a consultant because the lease does not permit lease audits on a contingency basis. This restriction is one reason we act as a consultant and not auditor in the landlord’s eyes, and tenants should avoid pulling the “audit card” on their landlord.
As mentioned earlier, it is unnecessary to exercise an lease audit right to question the validity of charges. While the contract allows the landlord to pass through CAM charges, it also requires them to comply with industry standards and the terms of the lease. Remember, 95% of mistakes resulting from human error or missing provisions are identifiable with a review of the lease document and CAM statements. It is very unusual that the need will arise to review the landlord’s books and records, which is what the audit language in the lease covers and where boundaries are imposed.
It is critical that tenants with significant CAM charges review the budgets and reconciliations presented by the landlord for accuracy. People with good intentions are preparing these statements, but mistakes are prevalent, and the savings opportunity is significant.
A consultant like National Lease Advisors can help tenants navigate this process with a complimentary review and proceed on a contingency success basis if both parties agree that such an effort would benefit the tenant.
Please reach out to us at info@NationalLeaseAdvisors.com to learn more or have your CAM charges reviewed.