Cumulative vs. Non-Cumulative Caps on Operating Expenses in Commercial Leases

Cumulative
Non-Cumulative

Understanding the difference between the two is critical for landlords, tenants, attorneys, and property managers to budget, bill, and negotiate leases fairly.

The Key Difference: Compounding Effect
Feature
Cumulative Cap
Non-Cumulative Cap

Cap Effect
Increases compound over time like a staircase.
Cap resets every year—only applies to that year.

Tenant Protection
More generous to the landlord over time.
More protective for the tenant year by year.

Landlord Recovery
Allows landlord to catch up on prior year shortfalls.
Landlord cannot recover unbilled increases from past.

Example Year 3 Cap Based on Year 1
105% x 105% x 105% = ~115.8% of Year 1 (compounded)
Still only 105% of Year 2 (not compounded)

A Simple Example
Let’s assume the tenant pays $100,000 in reimbursable CAM expenses in Year 1.

Scenario A: Cumulative 5% Cap
Each year, the cap compounds:

Year 2 Max: $100,000 × 1.05 = $105,000
Year 3 Max: $105,000 × 1.05 = $110,250
Year 4 Max: $110,250 × 1.05 = $115,762.50

So by Year 4, the landlord could charge up to $115,762.50.

Scenario B: Non-Cumulative 5% Cap
Each year, the cap resets based on the prior year only:

Year 2 Max: $100,000 × 1.05 = $105,000
Year 3 Max: $105,000 × 1.05 = $110,250
Year 4 Max: $110,250 × 1.05 = $115,762.50

So… they look the same?
Nope! Here’s the catch—what if the landlord didn’t increase the expenses to the max in a prior year?

Catch-Up Limitations
Here’s where it gets interesting.

Imagine in Year 2, actual charges were only $102,000 (under the cap):

Under a Cumulative Cap:
In Year 3, the landlord can still bill up to the compounded cap:
Year 3 Max: $110,250 (even if Year 2 was underused)

Under a Non-Cumulative Cap:
Year 3 is now limited to just 105% of $102,000, not Year 1:
Year 3 Max: $102,000 × 1.05 = $107,100

So the landlord loses the unused room to increase expenses. It does not carry forward.

Why It Matters for Property Managers and Accountants
Cumulative Caps require tracking prior years’ billed amounts and allowable increases to ensure landlords don’t exceed the total compounded cap.

Non-Cumulative Caps are easier to administer but limit recoverable costs if the landlord keeps increases low early on.

Audit & Compliance: You need clear records to demonstrate that cumulative increases are calculated correctly and to avoid disputes.

Budgeting: Knowing which cap type applies helps your team budget CAM recoveries more accurately year over year.

Final Tip: Look for “Cumulative Basis” in the Lease
If you see language similar to this:

“…shall not exceed one hundred five percent (105%), on a cumulative basis, of the portion of Tenant’s Additional Rent attributable to Common Area Expenses payable by Tenant for the previous year.”