CAM Charges consist of common area maintenance charges that are “passed through” to the tenant. This piece will examine a few of the key pass-through items assuming that the tenant has already signed a lease. There are many, many other provisions which can and should be addressed in the course of negotiating such provisions.

It is important to realize that the goal of the pass-throughs is to shift payment obligations from the landlord to the tenant. It is also important to realize that the obligation of the tenant to pay is solely a function of what the parties agreed to as reflected in the lease. When entering into a new lease, it is extremely important for the tenant to closely read the pass-through provisions (as well as the rest of the lease). More often than not the provisions will be broadly drafted, with the objective to sweep in as many expenses as possible into those charges permissibly charged to the tenant.

If there are far reaching pass-through provisions, is there nevertheless relief for the tenant? A lease is both a conveyance of an interest in real property as well as a contractual agreement. California law imposes on both parties a covenant of good faith and fair dealing in commercial transactions. A landlord will not be permitted to act in violation of that covenant.

If the lease provision is not clear on what is included as a permissible pass-through, extrinsic evidence on what constituted the agreement of the parties is permitted to clarify the issue. If still unresolvable, ambiguities or uncertainties are interpreted to the disadvantage of the drafter, which is almost always the landlord.

While there are literally hundreds of charges which can be included in pass-throughs, this article will focus on a few of more commonly disputed pass-throughs. While pass-throughs are clearly present in office buildings, even stand alone buildings and shopping centers are often subject to pass-throughs.

Maintenance/Capital Charges. Many people would agree that items of a capital nature should not be included in a pass-through. What constitutes a capital expense is controversial. IRS guidelines should not be dispositive. Neither should BOMA guidelines. GAAP defines capital expenditures as those expenditures with a useful life of over one year. Clearly, that is not real estate industry standard. The Statement of Financial Accounting Concepts restricts maintenance and repair items to those items that do not improve, enhance, or extend the life of the item. There are many gray areas in applying that standard. How should cost-saving capital expenditures be treated? What about government mandated ones? An easy way for a landlord to pass through capital expenses is to lease the item, rather than purchase it. Leasing expenses, even for capital items, clearly are a current operating expense. Should leased items properly be a pass-through? It is not uncommon for landlords to include as a maintenance and repair item repairs for the benefit of a particular tenant, the cost of which is borne by all. Is it appropriate when the repaired item is an over-standard tenant improvement the landlord obligated itself to provide to that tenant? Is it ever appropriate? Another common pass-through is maintenance reserves. Is that ever appropriate, and if so, at what level? Does the pass-through portion decrease as the lease term declines? A soon-to-be huge area of dispute will be landlord's software revisions occasioned by the year 2000 computer problem. Landlords may attempt to treat the software computer changes as current expenditures rather than amortized (capitalized) expenses. In this regard, landlords may have received assistance by the Emerging Issues Task Force of the Financial Accounting Standards Board (FASB) which recommends treating year 2000 costs as current year expenses!

Parking Garage Expenses. Buildings often run their parking facilities for guests of the building as well as other members of the general public. The operating costs of that business endeavor are often included as part of the operating costs, thereby allowing for a greater “profit” for the benefit of the building. Whether tenants ought to be subsidizing the operations of the building through pass-throughs is a thorny frequently asked question. The parking costs passed through are wide ranging, including a portion of insurance premiums, salaries, benefits, utilities, maintenance and repairs, and the like.

As noted above, the best way to deal with pass-through issues is to carefully negotiate the provisions prior to execution of the lease. There are many, many other provisions and issues that should be addressed in such negotiations, not the least of which is audit and review rights with full access to books and records. The failure to have done so is not the final answer, the covenant of commercial reasonableness may play a role in providing tenants with some relief.

Reimbursable Items. Whether by design or neglect, items are often included in pass-throughs nothwithstanding that there is a right to reimbursement from others for such charges, and even not withstanding that those reimbursements may actually be received. Equipment warranties, or items additionally separately charged to other tenants often get “double collected.” This is a common problem, and one fairly easily discoverable.

Leasing Expenses. Often included as pass-through items are lease commission charges, hard pass-through expenses of leasing agents, advertising and promotional fees, space planning costs, and standard tenant improvements to the new tenants. Sometimes included are over-standard tenant improvements and even sale commissions if the lease to a major tenant has an option to purchase, and the commission agreement covers such an event.

Management Fees. Many leases have a fixed management fee (a fee based on percentage of revenues raises additional questions, not addressed here). In those instances, charges related to the management of the building should not also be included as additional pass-through items. Many times they are. Many landlords own multiple buildings. The allocation of the costs of administrative salaries should be closely monitored. A tenant could be charged for expenses incurred in managing other buildings, or in managing the managers.

Typically included in pass-throughs, but perhaps not contemplated by the tenant, are headhunter recruiting fees, year end-bonuses, generous salary increases, “friendly” inflated salaries, benefits, professional dues and convention expenses, entertainment, training, management parties (Christmas, etc.), legal fees incurred in relations with other defaulting tenants, accounting fees in monthly and year-end accounting reports, and income tax preparation.

Utilities. If separately metered, utility charges are usually not controversial. Most leases require a tenant to pay a fixed percentage of the utility charges. However, should the landlord back out of the utility bill that portion of the utility charges used by the building’s management offices? Should “overuse charges” reimbursed by other tenants be backed out? What about the utility charges incurred by retail operations in the building? What about the parking lot with charged public use? What about that portion of the bill representing exterior building lighting not related to safety, i.e., spotlights to make a visual statement or holiday lighting?

Most newly constructed buildings are so-called “smart buildings.” They separately measure utility usage on a floor by floor or zone basis. The cleaning crews start on one floor and finish at the end of the shift on the last floor. Lights stay on until the crew overrides and turns them off. Should the tenant be charged for the “use” while waiting for the cleaning crews to arrive and finish? Many of the above examples are routinely included in pass-throughs charged to tenants.