Fixed CAM/Gross Leases – An Emerging Trend?

We may see this trend make inroads into Canada, especially as more US retailers enter the market.

History

In some ways, the trend to a flat CAM is a reversion back to a previous practice. Historically leases were commonly “gross” leases where tenants paid a rental amount and nothing further. The trend to net leases appeared in the late 60’s and early 70’s and seems to have been caused by the construction of shopping centres with interior malls. Operating costs for interior malls are substantially more than malls without an interior and landlords reacted by passing on those increased costs. Other types of leases followed suit.

In 2001, one of the major US shopping centre landlords abandoned variable CAM charges and moved to a fixed CAM. Recently two other major US landlords have followed suit to some degree, such as by offering tenants a choice of a fixed CAM or a variable CAM.

Benefits of Fixed CAM

The following have been seen as benefits to moving to a fixed CAM:

 

1. Lease audits (by tenants and by third parties working for contingency fees) have become more common and require landlords to devote a considerable amount of resources to respond. Fixed CAM eliminates this;
2. Negotiating the operating costs provisions of the leases tends to be one of the most time consuming components of a lease negotiation and it is thought that such negotiations could be made more efficient with a fixed CAM;
3. Tenants get certainty from a fixed CAM; and
4. Fixed CAM is seen as imposing more discipline on shopping centre managers to keep costs down.

Risks of Fixed CAM

Obviously the main risk of a fixed CAM to the landlord is that it passes the risk of change to the landlord and away from the tenant. This is mitigated to some degree by the trend in retail leasing to move to five year leases (while 20 to 30 years ago it was not uncommon to see 20 year leases). Landlords will also obviously build in a cushion which pushes the risk to some degree back to tenants and often the fixed CAM is subject to fixed increases each year.

Another way that landlords will mitigate this risk is to delete certain items from the fixed CAM (and keep such costs as variable). For example, realty taxes are generally outside of fixed CAM charges and charged separately. Utilities, snow removal and insurance are other costs that are often seen as non-controllable by landlords and may be pushed outside the fixed CAM.

From a tenant’s perspective, there is of course the risk that it will pay too much on account of fixed CAM (that is, agree to a number well in excess of the actual cost). Some have suggested that the tenant needs to do an audit or otherwise get comfortable with the landlord’s costs before agreeing to the number. Another potential risk seen by tenants is that landlords may reduce the level of management and operation as costs increase, resulting in a less attractive centre.

Conclusion

The trend towards fixed CAM seems to be picking up speed in the United States. Whether it makes the jump into Canada and, if so, at what point and to what degree, remains to be seen.

William (Bill) Rowlands is a partner and Chair of the Real Estate Group in Toronto. Contact him directly at 416-307-4065 or wrowlands@langmichener.ca.

This article appeared in Real Estate Brief Fall 2005. To subscribe to this publication, visit our Publications Request page.

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