Common Area Maintenance Caps

As you read through a triple net lease, consistently you have to jog your memory for what certain lease language means. Hopefully this explanation of CAM caps helps underline exactly what is entailed in each of these terms.

Controllable Expenses - usually the lease explains later on what the controllable expenses are, and good lease language will do that, however, I am writing this because lease language is often very bad. Usually, controllable expenses are expenses that a property owner can control, such as administrative costs, management fees, and Repairs and Maintenance costs. These will change per lease, as there is not a set deifinition in the real estate world, but often the lease will not define "controllable expenses" and this is what I assume.

Uncontrollable Expenses - usually property taxes, insurance, and utilities.

An article that I found on the South Florida market by Scott Brenner said this about controllable vs. uncontrollable, "Controllable expenses are things like janitorial services, management fees, garbage removal, repair and maintenance, maintenance engineers--the costs to run the building. Controllable expenses are everything other than real estate taxes, insurance, utilities and hurricane damage charges."

Cap Types - there are two types of caps: cumulative and non-cumulative.

Cumulative Caps - this means that you can increase CAMs 5% each year. So, in a five year lease you can increase CAMS up to 25% from the base year. Or if in year one CAMS increase by eight percent, you can only increase CAMs by 5%. In year two you can increase CAMs up to 5% on last years increased amount, and so on.

Non-Cumulative Caps - means that CAM costs cannot increase by more than 5% from year to year. Using the same example this means that if you have a five percent cap on CAMs, and in year one your controllable CAMs increase 8% you would only be able to increase CAMs 5%; however, in year two if CAMS increase by only 2% then you can only increase your controllable CAMs up to 2% of last years increased amount (the 5%, not the 8%). In year three if CAMs increase by 3% you can only increase CAMs by 3% on top of the 2% increase from the year before.

Barry Fleischer in his book "How to Lease Space in Shopping Centers" says "Over a long-term lease, the cumulative cap can grow much faster than the actual increase in expenses..." So for an owner of real estate a Cumulative cap on CAMs actually would not be too bad, however, a non-cumulative cap could mean that the tenant will reimburse less than you may accumulate in CAMs.