1. Landlord Fees – Migrate from Fee-ling Overcharged to Empowered!
Presented by:
Albert Stabile, CBRE
Jonathan Davis, Esq., Audit Resources LLC

2. Course Description
The purpose of this course is to provide a basic understanding of administrative and management fees included in CAM charges. We will discuss the intent, structure and economics of fee provisions and how to control the fees passed through to tenant. Examples of lease language will be used to identify and exclude fees that may be included in CAM expenses contrary to the terms of the lease. Basic legal concepts will also be discussed to assist in interpreting and applying lease language related to fees.

3. Course Objectives
Discover the intent of administrative and management fee provisions
Typical structure
Contractual interpretation
Application
How to better draft fee provisions

4. Introductions Who’s here? Who here performs lease audits?
Who here manages lease audits?
Are there any dealmakers?
Are there any attorneys in the room?
Who we are…..

5. Intent and Economics of Lease Provisions Related to Fees
Always lease dependent – if in doubt, refer to the lease language
General intent of landlord is to pass through costs directly related to real estate ownership and potentially create additional profit stream
Administrative and management fees are intended to cover the costs of managing administering the property

6. Intent and Economics of Lease Provisions Related to Fees
Generally, not intended to cover the costs of landlord’s ancillary business operations and costs not directly related to the subject property
Generally, not intended to cover landlord’s overhead and business expenses that are not directly related to managing the subject property
The inclusion of admin./mgmt. fees in the Lease will typically be to the exclusion of administrative and management costs in CAM

7. Contract/Lease Interpretation
Propriety of CAM expenses always comes down to lease language – and understanding it.
A lease is a contract, so contract law governs.
What was the intent of the parties? General reasoning discussed previously, but actual intent changes from lease to lease.
Unambiguous – Then the courts will only look within the 4 corners of the lease – meaning and intent can be determined by the Lease alone.
Ambiguous – Then courts apply rules of contract construction and can look outside of the lease, i.e. parol evidence.

8. Contract/Lease Interpretation
If Provisions Related to Fees are Ambiguous:
Apply rules of contract construction:
words are given their plain meaning
interpretation produces reasonable rather than absurd or commercially unreasonable result
specific provisions are preferred over more general provisions
contract is construed to render it enforceable rather than void
contract is generally construed against its drafter
scriveners error (a/k/a typo)
if provisions in conflict, they should be harmonized
A meaning shouldn’t be given to an ambiguous term that would make other provisions superfluous and meaningless
Landlord Expenses

9. Contract/Lease Interpretation
Parol Evidence 
When ambiguous, courts looks outside the 4 corners of the contract to determine the intent and meaning of the term, i.e. parol evidence (broader use than just ambiguity – mutual mistake, impossibility, etc.)
s, letters, memos, drafts of lease during negotiations

10. K’s Merchandise Mart v. Northgate, 296 Ill.App.3d 1137 (2005)
Expenses for operation and maintenance of common areas = direct out-of-pocket expenses, not uncertain management costs
Management fees = additional charges and indirect fees to cover LL’s indirect overhead or to add directly to LL’s profits
Out-of-pocket expenses are fixed, but management fees are not, can be arbitrary

11. K’s Merchandise Mart v. Northgate, 296 Ill.App.3d 1137 (2005)
“It is true that hiring snow removal or parking lot repair requires some supervision, but when a lessor pays itself for its time in managing service workers, uncertainty is added to the concept of maintenance expenses”
Management fees are not an implied CAM expense, must be in express provision of lease

12. Typical Express Exclusions
Utilities - Insurance - Taxes – Cap. Ex.
Why? Lack of proportionate administration or oversight
Depends on negotiation leverage
Lease placement always a consideration

13. Structure of Administrative and Management Fees
Based on a percentage of what expenses?
Calculation methodology?
Does lease allow for other administrative costs outside of fee?
What is expressly excluded?
Does its inclusion exclude all other landlord administrative expenses, business operations, and overhead?
CAM cap inclusion or exclusion?

14. Duplicative and Excludable Expenses
3rd Party Property Manager
Wages
% of salary
Office expenses
Unsupported allocations
Vendor providing administrative/management services
Affiliate or alter ego providing management services - (Case: Brookstone v. Pyramid – Management fee of LL or affiliate an operations cost?)

15. Duplicative and Excludable Expenses
Association fees
Customer service
Parking garage business operations
Snow fall reports
Meter reading
Leasing operations

16. + LL’s Admin and Mgmt. Oversight
Parking Lot Repairs, Snow Removal, Utilities (including LL’s offices), Real Estate Taxes, Income Taxes, Employee Wages (including management), Janitorial (including mgmt. office), LLC Fees, Insurance, Customer Service, Landscaping, Holiday Decorations, Office Space, Trash Removal, FedEx, Lighting Repairs, Legal Fees, Capital Expenses, Security, Water, HVAC, Broker Commissions, Sweeping, Advertising, Office Supplies, 3rd Party Property Manager, Association Fees, Build-Out Expenses
Landlord Expenses
+ LL’s Admin and Mgmt. Oversight
Pass-Thru Expenses and Fees Allowed by Lease
CAM, Admin and Mgmt. Fees, and Direct Tenant Expenses

17. Example #1
Fee Provision 1: “As used herein the term ‘Administrative Fee’ shall mean an amount equal to three percent (3%) of the Common Area Expenses (exclusive of taxes, capital expenditures and Administration Fee). Notwithstanding the foregoing, the term Common Area Expenses shall include the Administrative Fee.”

18. Example #1 What should be excluded from the admin fee? Taxes
Capital Expenditures
Administrative Fee
Anything Else?

19. Example #2 Fee Provision 2:
“As compensation for the operation and maintenance of the Common Areas as specified in Section 4.1 and 4.2 hereof, Developer shall receive a fee equal to 5% of the total cost of the maintenance and operation of the Common Area as determined under Section 4.4 hereof.”

20. Example #2 What should be excluded?
Any expenses and/or fees not included and/or excluded from costs of operation and maintenance of the common area under the terms of the lease.
Look to Section 4.1, 4.2, and 4.4 of the lease to determine what is expressly included and excluded in the calculation of “total cost of the maintenance and operation of the Common Area”

21. Example #3 Fee Provision 3:
“Common area costs shall not include… administration expenses in excess of five percent (5%) of said common area costs.”
What does this mean?
Only exclude administrative fees over 5%? Can it be less than 5%?

22. Example #4 Fee Provision 4:
Common Area Costs exclude: “any and all costs associated with the operation of the business of the entity which constitutes Landlord (excluded items specifically include, but are not limited to, formation of the entity, internal accounting and legal matters, including but not limited to preparation of tax returns and financial statement and gathering data thereof, costs of defending any lawsuits with any mortgagee, costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord’s interests in the Building or the Shopping Center, costs of any disputes between Landlord and its employees, disputes between Landlord and managers of the Building or the Shopping Center, and disputes between Landlord and tenants or occupants within the Building or Shopping Center including, without limitation, Tenant).. .”

23. Example #4
“any and all costs associated with the operation of the business of the entity which constitutes Landlord”
“Operation of business”? - Internal accounting, legal, tax, sales, financing, analysis, legal disputes
What constitutes “Landlord”?
Wages and salaries of Landlord employees?

24. Example #4
Sheplers, Inc. v. Kabuto International, 63 F. Supp.2d (D Kan. 1999). If less than 100% of an expense goes to actual common area maintenance, than the Landlord must keep reasonably detailed documentation supporting any portion of that expense allocated to CAM (e.g., time sheets, detailed expense reports, detailed invoicing, etc.). Otherwise, expense should be disallowed.
Governmental fees and costs associated with entity formation and filing (LLC, corp., etc.)? Tin Tin v. Pacific Rim, 170 Cal.App.4th 1220 (2009). LLC fees and taxes did not qualify as costs “relating to the ownership and operation” of the center.

25. Example #5 Fee Provision 5:
“For purposes of this Lease, the management fees includable in Operating Expenses, inclusive of any cost and materials and supplies used in connection with such management, Landlord's general overhead and salaries and benefits of Landlord's management personnel, officers and executives, shall be no greater than ten percent (10%) of Operating Expenses, as herein defined.”

26. Example #5 What should be excluded?
Management Fee expenses calculated using any expense not designed specifically as an Operating Expense.
In particular, real estate taxes if not definitively defined as a component of Operating Expenses.
Any others?

27. Example #6 Fee Provision 6:
Under Operating Exclusions -  “(o) advertising and promotional expenses of the Building, charitable donations and voluntary contributions (except for any membership or other dues or fees from time to time customarily incurred by the landlord of a first-class CITY office building and not in excess of $5, per year….”

28. Example #6 What should be excluded?
Costs and expenses of the landlord in advertising leasable area, promotions and incentives to prospective and new tenants.
Voluntary membership fees in excess of $5,000 of the landlord entity.

29. Questions?

30. Thank You For Attending!
Presenters
Jonathan Davis, Esq:
Legal Counsel, Audit Resources LLC
Albert Stabile:
Vice President, Lease Audit, CBRE