A cap structure where the maximum allowable increase each year is calculated on the prior year's actual or capped amount rather than the original base year figure. Compounding caps allow expenses to grow exponentially over time, resulting in significantly higher charges than a simple (non-compounding) cap over a long lease term.
Under a compounding cap, Year N maximum equals Year (N-1) capped amount multiplied by (1 + cap rate). This differs from a simple cap where Year N maximum equals Base Year amount plus (Base multiplied by cap rate multiplied by N). Over a 10-year lease with a 5% cap, compounding yields a 62.9% total increase versus 50% under a simple cap. The distinction is often buried in lease language and has material financial impact.
A tenant negotiates a "5% CAM cap" assuming it means CAM cannot grow more than 5% per year from the base. The lease language says "5% increase over the prior year," making it compound. After 10 years, the tenant's CAM is 63% above the base instead of the 50% they expected.
Read your cap clause carefully to determine whether the percentage applies to the base year amount or the prior year's amount. The words "over the prior year" or "year-over-year" indicate compounding. Model out both scenarios over your full lease term to understand the financial difference.
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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.
