The AIR multi-tenant lease (gross) is a “modified” gross lease. A tenant pays its share of any increase in taxes and insurance over a base year. However, there is no base year for CAMs (Common Area Maintenance Fees). A tenant therefore pays its share of the total CAMs for the year. Many owners of industrial projects modify the AIR lease so that there is a base year for all three items: taxes; insurance; and CAMs.
In this situation, there are two changes to the AIR multi-tenant lease (gross) which landlords may wish to make in order to maximize recovery of expenses:
- Base Year Expenses: If there are CAM expenses that will be incurred in the base year that occur less often than once a year (exterior painting of the building, for example), landlords may exclude such expenses from the base year calculation.
- “Three Buckets” Approach: Landlords may wish to separate increases in CAMs, increases in property taxes, and insurance increases into three separate “buckets.” In this way, a decrease in one of the three buckets will not offset an increase in one of the other two buckets. This can lead to landlords recovering more of its expenses.
I will illustrate the “three buckets” approach with an example. Assume that in the base year, taxes are $100, insurance costs are $100, and CAMs are $100. In year 2, assume taxes are $105, insurance costs are $105, and CAMs are $90. If the traditional approach is used, then the tenants at the project would not pay any expenses. The base year expenses were $300, and the year 2 expenses were $300. There was no increase.
If the “three buckets” approach is used, each item would be calculated separately. The tenants at the project would pay the increase in taxes over the base year ($5), the increase in insurance costs over the base year ($5), and $0 for CAMs (since the CAMs went down in year 2). Therefore, the landlord would recover $10 in expenses in year 2 under the “three buckets” approach as compared to no recovery of expenses with the traditional approach.
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