A fund set aside by the landlord to cover future capital expenditures such as roof replacement, HVAC system upgrades, and parking lot resurfacing. Some landlords attempt to pass capital reserve contributions through as CAM expenses, which many leases prohibit.
A capital reserve (also called a replacement reserve or sinking fund) is an accounting reserve funded by annual contributions to cover anticipated future capital expenditures. In commercial real estate, the reserve is typically funded from property operating income. The distinction between capital reserves and operating expenses is critical for CAM: contributions to a capital reserve are not current operating expenses and should not be included in the CAM pool unless the lease specifically permits it. Some leases allow amortized capital expenditures but prohibit reserve contributions.
A landlord included a $75,000 annual "capital reserve contribution" in the CAM reconciliation. The lease permitted pass-through of operating expenses and amortized capital costs, but said nothing about reserve contributions. The landlord was collecting money for future projects that might never happen, effectively charging tenants for expenses that had not been incurred.
Look for line items labeled "capital reserve," "replacement reserve," or "sinking fund" on your reconciliation. Unless your lease explicitly allows reserve contributions as a CAM pass-through, these charges are likely improper. Even if permitted, the contributions should be reasonable and tied to a documented capital plan.
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Find My OverchargesThis page provides general educational information. It is not legal advice and may not reflect the most current law in your state. Consult a licensed attorney for advice specific to your situation.
