What are operating expenses?
“Operating Expenses” mean all costs and expenses of every kind and nature owning, operating, managing, repairing, insuring, securing and maintaining the Center, the Common Areas and other portions of the Center include, but not limited to the following:
- REA
- Lighting/signing
- Cleaning/janitorial/trash removal
- Painting, striping, parking lot cleaning
- liability insurance/ personal/ property/ workers comp etc.
- payments as required by Governmental Authorities;
- maintenance, repair and replacement of utility systems serving the Center, including water, sanitary sewer and storm water lines and other utility lines,
- maintenance, repair or replacement of awnings, paving, curbs, walkways, landscaping, roofs, walls, drainage, pipes, ducts, conduits
- administrative costs attributable to the Common Areas for on-site personnel and an overhead cost equal to fifteen percent (15%) of the total costs and expenses of operating, managing, maintaining and insuring the Center.
CAP ON TENANT’s PERCENTAGE SHARE OF CONTROLLABLE OPERATING EXPENSES
In no event will Tenant’s payment of Tenant’s Percentage Share of Operating Expenses increase by more than the Operating Expense Cap. The Operating Expense Cap will only apply to controllable Operating Expenses and will in no event apply to any cost or expense related to insurance, utilities, waste collection, security, weather related maintenance, compliance with changes in Governmental Requirements or any other cost or expense not controllable by Landlord. In addition, the Operating Expense Cap will not apply to Real Estate Taxes.
CUMULATIVE V. NON-CUMULATIVE
Cumulative Caps
Landlords prefer cumulative caps, as it provides maximum flexibility in deciding what costs will benefit the shopping center. A cumulative cap sets a ceiling on the annual increases in CAM expenses that can be passed on to a tenant.
Most importantly – the “cumulative” nature of this cap allows the landlord to recover any unused increases from prior years.
Example, let’s say that the landlord and tenant agree to a 5% cumulative cap. If CAM expenses increase by 3% in year 1, then the tenant would pay the 3% increase. If CAM expenses increase by 10% in year 2, then the tenant would pay a 7% increase. This is because, in addition to the 5% cap, the landlord can recover the 2% increase that went unused in year 1.
Non-Cumulative Caps
Tenants prefer non-cumulative caps, as they want to budget and avoid unexpected increases in CAM expenses.
A non-cumulative cap sets a ceiling on annual increases in CAM expenses and does not allow the landlord to recover any unused increases from prior years.
Example, if the landlord and tenant agree to a 5% non-cumulative cap in the example above, the tenant would pay the 3% increase in year one and just a 5% increase in year 2.
CONCLUSION
During lease drafting & negotiations, pay close attention to whether the tenant is proposing a non-cumulative cap. Also be careful to understand the other factors that go into negotiating a CAM cap, such as determining what costs will be included and excluded from the cap. The failure to do so can make a big economic difference over a lease term.