Flat CAM Charges in Shopping Centers

As covered malls sprouted across the country in the late 60s and early 70s, the gross lease of yesteryear became instantly anachronistic and unprofitable for shopping center owners who were unable to budget accurately for new and uncertain cost structures. Shopping center owners sought to preserve “triple net” returns by ensuring any operating cost uncertainty would be borne by retailers. Cost recovery was king, and shopping center owners felt no compulsion to control or manage spiraling expense structures so long as retailers were ultimately responsible for bearing operating and management inefficiencies. Throwing fuel onto the fire, many shopping center owners created in-house or captive management companies whose fees were tied to total CAM charges collected, thereby creating a perverse incentive to maximize CAM costs and complexity, without commensurate benefit in project operations.

Not surprisingly, sophisticated retailers swiftly responded by insisting that shopping center owners be held accountable to basic budgeting parameters in establishing and escalating CAM charges. Without these minimal protections, retailers were not able to project true lease costs and therefore unable to secure requisite management approvals to lease transactions. The retailers' attack on open-ended CAM charges was twofold. First, retailers sought to limit the type of CAM charges that were properly chargeable to the project and included within customary and reasonable operating expenses. These so-called CAM exclusions quickly became the focal point of lease negotiations, to the point where the exclusions outnumbered the inclusions, and spawned a cottage industry for brokers and attorneys who reveled in the type and number of exclusions that might be crafted, limited only by a fertile source of imagination and landlord animus. At their core, these exclusions sought to distinguish between “investment costs” (incidents of property ownership and not properly recaptured from project tenants) and “operating costs” (costs of normal and routine operation, maintenance and repair at the property and properly recoverable from tenants). While distinction between investment costs and operating costs generally was well settled, project owners and retailers typically fought tooth and nail over certain items, such as the owner's right to recapture the costs of capital improvements that are made to reduce CAM charges or to comply with new legal requirements. Although capital expenditures seemed to be clearly investment costs rather than operating costs, shopping center owners asserted that inclusion of these particular expenses was necessary to preserve the net character of the base rent. Retailers argued that any contribution of capital costs constituted an unwarranted subsidy that shifted investment risk to parties that did not expect and were not entitled to accompanying investment returns. Reconciling these positions proved difficult, time consuming and costly, and diverted the parties' attention from more pragmatic and immediate economic concerns. While a compromise position respecting the fundamental nature of the shopping center owner-retailer relationship generally was reached, it was neither cost effective nor an efficient allocation of the parties' respective resources. A similar dialogue ensued concerning other disputed CAM charges, with mixed (and oftentimes meaningless) results.