Usually, at the end of every year or at the beginning of the new year, landlords send out their “CAM Notices” or “Rent Notices” in which they inform commercial tenants of their monthly rent for the upcoming year. Depending upon what type of commercial lease a tenant might have, one or more factors may cause the rent to increase in the new year. Tenants should spend time examining these notices to ensure that the information contained in them is correct and consistent with the lease they entered into and perhaps modified afterward.
Some leases do not directly pass on any of the operating costs of the property. This type of lease is called a “gross lease”. Notices received under gross leases may only detail an increase in the rent because of a stated increase or fixed percentage increase in the rent provided for in the lease at the outset when it was signed, or alternatively refer to an index, such as the Consumer Price Index as a basis for any rent adjustments in the coming year.
Under a “modified gross lease”, the landlord passes on some but not all of the operating costs of the property to the tenant, such as real estate taxes and insurance. In addition to containing the information noted above, when there is a modified gross lease, the landlord’s notice will probably state the anticipated cost of the passed through expense for the coming year, and the tenant’s monthly (i.e., 1/12th) share of the these passed through expenses based upon the tenant’s pro-rata percentage occupancy of the building.
When all of the operating expenses for the property are passed on to the tenant by the landlord under a lease, the lease is typically referred to as a “net lease” or “triple net” lease. In this instance the rent increase or CAM notice is more elaborate. As before, a portion of the notice details the basis for any increase in the monthly rent due to a preset rent increase in the lease or an external formula for adjusting the rent, but now the portion of the notice dealing with the operating expenses of the property passed through to the tenant might expectedly contain more information than if the notice related to a modified gross lease.
No matter what the lease type, the tenant should carefully compare the information contained in the landlord’s notice to the lease (e.g., pro-rata percentage of building, basis for base rent increases in the lease independent of any pass through, specifics of the passed through expense, if any). If the rent increase was based upon a CPI increase, the back up for the CPI based increase should be provided. In the case of both a modified gross lease and a net lease the tenant may want to ask the landlord for copies of the 2017 real estate tax bill and the 2017 insurance premium bill so that the tenant can compare those actual costs to the projected 2018 cost. If the landlord’s notice pertains to a net lease, the tenant may also want to ask for a copy of the property’s operating expense statement for 2017 to compare it to the projected operating expenses for 2018.
This coming year, tenants should also carefully review the monthly sales tax amount that they are being charged. Beginning on January 1, 2018 the state level sales tax will be reduced from 6% to 5.8 % for rental payments attributable to a tenant’s occupancy of a premises during January, 2018 and after.
Certain counties, such as Miami-Dade County, Florida impose a local option surtax on commercial or short term rents. . The recent change in the state level sales tax has no effect on local surtaxes. Thus, in Miami-Dade County, FL. the sales tax rate on monthly commercial rents will be 6.8% instead of the 7% that was previously charged.
The year is young and there is still time to save money by critically reviewing the landlord’s recent rent or CAM notice