Commercial leases for shopping centers and office buildings will often require the tenant to pay a share of common area maintenance (CAM) expenses, which are also frequently referred to as operating expenses. Tenants generally want to put a cap on CAM expenses, which leads to negotiations as to whether this cap will be cumulative or non-cumulative. So, what is the difference between cumulative and non-cumulative CAM caps?
Landlords prefer cumulative caps, as they want maximum flexibility in deciding what costs will benefit their shopping center or office building. A cumulative cap sets a ceiling on the annual increases in CAM expenses that can be passed on to a tenant. The “cumulative” nature of this cap allows the landlord to recover any unused increases from prior years. For example, let’s say that the landlord and tenant agree to a 5% cumulative cap. If CAM expenses increase by 2% in year 1, then the tenant would pay the 2% increase. If CAM expenses increase by 10% in year 2, then the tenant would pay an 8% increase. This is because, in addition to the 5% cap, the landlord can recover the 3% increase that went unused in year 1.
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. For example, if the landlord and tenant agree to a 5% non-cumulative cap in the example above, the tenant would pay the 2% increase in year one and just a 5% increase in year 2.
During lease negotiations, landlords and tenants should pay close attention to whether the other party is proposing a cumulative or non-cumulative cap. The parties should 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 difference down the road.