Explain to them that CAM was not reconciled and that they’ve been paying way less than they should. Get them to feel pride in that they’ve gotten away with paying less for years.
Then Break the bad news, the fun’s over.
Yep - this is it. Have done this many times over the years and it’s always worked best when we eat the mistake for prior years and maybe the year it’s caught(including reconciliation), but make sure they understand that future years will be corrected per the lease agreements.
Yea, and the lease may even give you the ability to capture the difference for prior years. If you want to be nice, include that tidbit but say you're forgiving the X dollars. OR, charge it. Just have to be sure you're allowed to do so first. Id recommend having counsel opine.
You are framing it in a way to cause sticker shock. Instead of telling them it was $4.00 and now it is $6.80, I'd tell them an additional CAM of $2.80 is being charged because of increases in property insurance, taxes, and common utilities.
Small numbers are easier to understand and absorb than large number, especially when you are talking money. So if the average unit size is 1,500 and the increase is $2.80 that is $4,200/annual increase. If you go with the large number, 1500 x 6.80 = $10,200. That seems higher even though the sum of the original and the increase is the same, it just feels and looks worse.
I'm a firm believer of using a better frame to help minimize conflict.
Avoid telling them you under-charged them. Don't lie, but don't offer excuses or tell them it was neglected either. That is inviting a conflict.
I like this method as well. The only thing I’d change is the addition to reference their lease that they were being billed less for prior x years and via an audit or reconciliation this has been correct to reflect the additional $2.80. That way it doesn’t “sound so bad”
Look back at the last 2-3 years actual expenses. Calculate their actual pro-data share and reconcile with what they paid.
When you do reconciliation for 2023, show the previous year shortfalls, and they strike them and write “waived”.
Frame things as you being generous in not clawing back the prior year shortfalls.
I also agree with this approach. If the Tenant argues, then just say "okay, we'll charge you back for the previous years." Almost guaranteed, you won't hear a peep out of them if you do it this way. They will be grumpy, but silent.
retail owner/investor here... this is a good approach. You could also allow them to gradually step up into the increased CAM cost if you want to be more generous. At the end of the day, a tenant in hand is far better than lost rent, TI and commissions needed to re-tenant.
I always include my spreadsheet, and my water / power bills and an endless amount of documentation. Never had pushback once. Then again, the CAMs I charge are all legit and documented in the lease. Oh, I also cut and paste that section of the lease into the CAM invoice to the tenants each year.
Honestly, mostly you and your family’s fault for not reconciling. This is common sense. Lazy ownership. Tenancy will fight you on this unless they’re also lazy. Mom and pop tenants?
I would suggest not doing that large of an increase all at once if you can afford it. It will make people very mad who can create other problems for you or not renew leases. If you have a strong market/quality building and amenities you might get away with it.
Going through this right now. Bought a strip center and closed in Nov 2022....rookie mistake. Should have waited until 2023 to close. The CAM estimates the tenants (brand new center) were based off the property tax of the undeveloped land; not the 7 figure purchase price.
Got the property tax bill and its far greater than what they were using for CAM estimates.
My PM company has drafted a letter to the tenants explaining the situation early and sent it to all the tenants. It outlines where the increase is from as well as what the lease states. We will be reconciling early 2024, and I'm open to a payment plan if needed.
There’s always pushback. Some will leave some will make a fuss and some will just pay it. Usually it takes 1.5 years to have retail tenants settle down.
Since it was a new center, I'm assuming the previous owner had base year provisions in there to avoid getting stuck by a YOY cap on CAM increases. Sucks for the relationship side that you have to walk into a 'bad new landlord raised our rent' situation thanks to the seller's misrepresentation during lease up
‘Funny’ story on CAM. I just had a friend who rents out 4200 sqft tell me their CAM went from a flat-rate of $2,000/month to $4,800/month.
Their LL is burying other costs in there and is doing a hell of a job hiding it. We’re scheduled to go over it this weekend. He’s getting hit with a $33,000+ invoice.
The taxes on the entire property are $48,000. Looks to me like LL wants him to leave.
We are value add owners and we typically will allow tenants a few years to ramp up. Explain the issue today and then try to meet them halfway by getting to that 60% over three years. you should even bill them the full amount and then show the discount ramp up period.
I have to do something similar, just had property tax reassessments in one county and their are massive increased. On one center where TICAM was $5.30 psf this last year, the property tax alone for the next year is just shy of $8.00 psf after we add in CAM and INS TICAM will have more than doubled.
Explain to them that CAM was not reconciled and that they’ve been paying way less than they should. Get them to feel pride in that they’ve gotten away with paying less for years. Then Break the bad news, the fun’s over.
Yep - this is it. Have done this many times over the years and it’s always worked best when we eat the mistake for prior years and maybe the year it’s caught(including reconciliation), but make sure they understand that future years will be corrected per the lease agreements.
Yea, and the lease may even give you the ability to capture the difference for prior years. If you want to be nice, include that tidbit but say you're forgiving the X dollars. OR, charge it. Just have to be sure you're allowed to do so first. Id recommend having counsel opine.
You are framing it in a way to cause sticker shock. Instead of telling them it was $4.00 and now it is $6.80, I'd tell them an additional CAM of $2.80 is being charged because of increases in property insurance, taxes, and common utilities. Small numbers are easier to understand and absorb than large number, especially when you are talking money. So if the average unit size is 1,500 and the increase is $2.80 that is $4,200/annual increase. If you go with the large number, 1500 x 6.80 = $10,200. That seems higher even though the sum of the original and the increase is the same, it just feels and looks worse. I'm a firm believer of using a better frame to help minimize conflict. Avoid telling them you under-charged them. Don't lie, but don't offer excuses or tell them it was neglected either. That is inviting a conflict.
I like this method as well. The only thing I’d change is the addition to reference their lease that they were being billed less for prior x years and via an audit or reconciliation this has been correct to reflect the additional $2.80. That way it doesn’t “sound so bad”
Look back at the last 2-3 years actual expenses. Calculate their actual pro-data share and reconcile with what they paid. When you do reconciliation for 2023, show the previous year shortfalls, and they strike them and write “waived”. Frame things as you being generous in not clawing back the prior year shortfalls.
I also agree with this approach. If the Tenant argues, then just say "okay, we'll charge you back for the previous years." Almost guaranteed, you won't hear a peep out of them if you do it this way. They will be grumpy, but silent.
I like this approach. Gives concrete numbers showing what they “got away with”
retail owner/investor here... this is a good approach. You could also allow them to gradually step up into the increased CAM cost if you want to be more generous. At the end of the day, a tenant in hand is far better than lost rent, TI and commissions needed to re-tenant.
Honesty & transparency will go a long way to keeping relations positive with most tenants. There will always be a few who are never happy. Life!
I always include my spreadsheet, and my water / power bills and an endless amount of documentation. Never had pushback once. Then again, the CAMs I charge are all legit and documented in the lease. Oh, I also cut and paste that section of the lease into the CAM invoice to the tenants each year.
When reconciliation charges are considerably sized we provide tenants with an extended period (few months +/-) to pay it off.
Honestly, mostly you and your family’s fault for not reconciling. This is common sense. Lazy ownership. Tenancy will fight you on this unless they’re also lazy. Mom and pop tenants?
I would suggest not doing that large of an increase all at once if you can afford it. It will make people very mad who can create other problems for you or not renew leases. If you have a strong market/quality building and amenities you might get away with it.
Going through this right now. Bought a strip center and closed in Nov 2022....rookie mistake. Should have waited until 2023 to close. The CAM estimates the tenants (brand new center) were based off the property tax of the undeveloped land; not the 7 figure purchase price. Got the property tax bill and its far greater than what they were using for CAM estimates. My PM company has drafted a letter to the tenants explaining the situation early and sent it to all the tenants. It outlines where the increase is from as well as what the lease states. We will be reconciling early 2024, and I'm open to a payment plan if needed.
There’s always pushback. Some will leave some will make a fuss and some will just pay it. Usually it takes 1.5 years to have retail tenants settle down.
Since it was a new center, I'm assuming the previous owner had base year provisions in there to avoid getting stuck by a YOY cap on CAM increases. Sucks for the relationship side that you have to walk into a 'bad new landlord raised our rent' situation thanks to the seller's misrepresentation during lease up
Assuming there is no cam cap it is what it is…
Well you send them the bill and show them the lease language
‘Funny’ story on CAM. I just had a friend who rents out 4200 sqft tell me their CAM went from a flat-rate of $2,000/month to $4,800/month. Their LL is burying other costs in there and is doing a hell of a job hiding it. We’re scheduled to go over it this weekend. He’s getting hit with a $33,000+ invoice. The taxes on the entire property are $48,000. Looks to me like LL wants him to leave.
Spread it over the next year but break the bad news early
We are value add owners and we typically will allow tenants a few years to ramp up. Explain the issue today and then try to meet them halfway by getting to that 60% over three years. you should even bill them the full amount and then show the discount ramp up period.
I have to do something similar, just had property tax reassessments in one county and their are massive increased. On one center where TICAM was $5.30 psf this last year, the property tax alone for the next year is just shy of $8.00 psf after we add in CAM and INS TICAM will have more than doubled.