Caution for Landlords on Permissible CAM Charges

February 10, 2009

Commercial landlords who wish to pass through to tenants as common area maintenance ("CAM") charges the gross receipts fees payable for their limited liability companies should carefully review their leases to determine whether that is permissible. LLCs doing business in California pay a "gross receipts fee" to the Franchise Tax Board based on the total income reportable to the State of California. As a risk mitigation strategy, or because of lender requirements, most commercial landlords today hold commercial centers through LLCs. Thus, the rents received by the landlord can trigger liability to the Franchise Tax Board for the gross receipts fee. (It is worth noting that a number of authorities believe the "fee" is really a disguised tax and therefore illegal as not having been enacted by a two-thirds vote of the state legislature. This issue has been working its way through the courts.)

In Tin Tin Corporation v. Pacific Rim Park, LLC (2009) 2009 DJDAR 1623, the Court of Appeal held that the CAM clause did not permit the commercial landlord to pass through the gross receipts fee. The LLC gross receipts fees were a cost of conducting business in the limited liability company form, the court determined, and therefore were not costs incurred by the landlord related to the ownership and operation of the subject commercial project.

Landlords wishing to pass through their LLC gross receipts fees, are cautioned to expressly permit such a pass-through in their leases. Landlords who already have been passing this cost through to their tenants should consider reviewing their leases to avoid CAM disputes with their existing tenants.