Ground Lease Payments as a CAM Expense

I feel a little bit like I am lurking in my LinkedIn groups for topics of interest to write about.  Sorry if it seems so, but there are some good questions and ideas that come out of the groups that I like to comment on, both in the groups and on my blawg, in more detail.

Steve Hupman, CPM, started a discussion on: 

"Ground Lease payments as a CAM expense in a Class A office building."

I chimed in by stating:

"Seems to me that a ground lease payment is just another way to finance an interest in the real property.  From a technical perspective, it is not a "fee" interest but an interest, nevertheless.  From an historical perspective, and I am just speaking from anecdotal experience, owners don't include their financing costs in operating expenses, since they are generally not considered an expense of operating the property.  They would be considered an expense of ownership.  With that being said, I really have no problem with an owner trying to get a pure NNN return on their property so long as it is clear that all of the landlord's expenses of owning, managing and operating the property are to be included in the definition of operating expenses and the broader definition of "building expenses" or additional rent.  For my part, as a tenant, I would strongly resist any attempt by the landlord to include their cost of ownership."

Comments

[P]

Howard, I agree with you on all accounts. I don't believe it should be included as an operating expense even though many leases permit the landlord to pass through "lease payments" in their definition of OpEx - but those were designed for leases of vehicles, equipment, etc. Even as a landlord's rep I have a hard time with that one.

This is a practice that would set up a course to create ground leases between related (landlord) parties and may also impact P3 structures. I just don't think it would be good practice in the long run.

Peter Morris
www.beyond-the-building.com