Negotiating CAM-Cost Provisions

By Neil T. Neumark

Lease Type: Retail

Property: 360,000 SF neighborhood shopping center in Minnesota

Premises to Be Leased: Big box (55,000 SF)

Tenant: National retailer

Lease Term: 10 years, with four five-year renewal options

One of my clients, the owner of 360,000 square feet of retail space in a Minnesota shopping center, requested a typical common area maintenance (CAM) clause: one that requires the tenant to reimburse the owner for the tenant's pro rata share of the expenses the owner incurs to maintain and operate the shopping center's common areas.

However, the tenant, a big box national retailer, wanted a fixed CAM contribution equal to its pro rata share of the then-current actual CAM costs for the shopping center. The tenant would then agree to a 5 percent compounded annual CAM increase over the life of the lease. In other words, each year the fixed CAM contribution would increase by an amount equal to 5 percent of the prior year's fixed CAM contribution.

The owner hesitated, concerned that because the lease allowed for a potential 30-year term, the actual CAM expenses eventually could significantly exceed 5 percent compounded annual increases.

I recommended that the parties resolve the conflict by agreeing that the fixed CAM contribution would apply to the initial 10-year term only. If the tenant exercised any of its renewal options, the fixed CAM contribution would be “readjusted and rebalanced” to an amount equal to the actual CAM expenses for the center for the year immediately preceding the commencement of the renewal term. For the remaining four years of the applicable renewal term, the rebalanced fixed CAM contribution would increase at a 5 percent compounded annual rate.

The parties thought the CAM rebalancing idea was a good compromise, but the owner was concerned about the possibility of the parties' having to use a year with abnormally low CAM expenses as the basis for future CAM payments.

I then recommended that the rebalanced fixed CAM contribution be an amount equal to the actual CAM expenses for the center for the year immediately preceding the commencement of the applicable renewal term. I recommended that the parties further agree that the rebalanced fixed CAM contribution could not be less than the average of the actual CAM expenses for the center for the three years immediately preceding the commencement of that renewal term. Over the remaining four years of the applicable renewal term, the rebalanced fixed CAM contribution would again be increased at a 5 percent compounded annual rate.

By averaging the actual CAM expenses over a three-year period, the owner would be assured of a “floor” on the rebalanced fixed CAM contribution.

Neil T. Neumark is a partner with Schwartz Cooper Chartered, a Chicago law firm, and member of the CLLI Board of Advisors. He can be reached at (312) 845-5402.