CAM Charges and the Year-End Reconciliation: What to Negotiate Before the Bill Arrives

The reconciliation: what arrives, and when

Through the year you pay your share monthly, on the landlord's budget estimate. After the books close, a statement shows what the building really spent, measured against the base year. An overpayment returns as a credit, a shortfall becomes a bill, and the following year's estimates are reset from the actual numbers.

Operating expenses works one such statement through on a real floor.

Four terms to settle at the letter of intent

Each of these costs the landlord nothing on signing day, which is why they can be won then and almost never later.

• The base year. Ask for the first full calendar year of the term, calculated as though the building were full and fully serviced.
• Caps. A yearly limit on growth in controllable costs, the ones set by the landlord's own contracts for cleaning and repairs, and a fixed or capped management fee. Taxes, insurance and utilities usually float.
• Exclusions, in writing. Capital improvements, unless they are amortized and reduce costs. The landlord's financing costs and ground rent. Commissions on other tenants' leases.
• Audit rights. A realistic period in which to examine the statement, and a clause that moves the audit's cost to the landlord if a material overcharge is found.

Have your attorney confirm the wording of each clause in the lease itself. How to negotiate an office lease shows where these sit among the other terms.

How building class changes the exposure

In a Class A tower, expect the full pass-through: an operating expense escalation and a tax escalation, each against a base year, written on a long landlord form. A tower tends to run more shared services, so there is more that can grow, and the definitions deserve the closest reading there.

In an older Class B or C loft building, the owner often leaves the accounting out and charges a fixed percentage increase each year. That can be budgeted to the dollar and brings no year-end surprise, which frequently makes it the cleaner deal for a company taking a single floor. Class A, B and C explains what else the letters predict about a lease.

The floors below are in Midtown, Manhattan's traditional corporate core, so ask how each building bills these costs before you tour it.

Where tenants lose money on these charges

• A compromised base year. A term that starts midyear can leave a base of only a few months, and a year in which the building ran light makes the return to normal look like an increase.
• Capital work billed as maintenance. A new lobby charged to tenants as repairs makes them pay for an upgrade the owner keeps.
• An expired audit window. The right to dispute a statement often lapses, sometimes within a year of its arrival.

Who negotiates the reconciliation terms for the tenant

The broker and the attorney, at different stages. The broker raises the base year, the caps, the exclusions and the audit right in the letter of intent, while the terms are still cheap to move. The attorney then holds the lease draft to it and checks the expense definition word by word. On your search, we work for you, and we raise these four points on nearly every deal.