What are Common Area Maintenance (CAM) charges in real estate?
Common area maintenance or CAM charges are the costs associated with the common areas in a property. The tenant pays these charges to the landlord. CAM charges typically include expenses towards administrative fees, elevators, property taxes, electricity for common areas, and parking lot maintenance.
The lease agreement defines CAM charges and specifies the calculation method. However, calculating CAM charges can sometimes be a complex exercise. Additionally, the tenant and the landlord must word the lease agreement carefully to protect their respective interests.
This post delves deeply into the expenses commonly categorized as CAM charges and explores how lease agreements incorporate CAM fees. We will also explore some methods to calculate CAM charges. Finally, we will list a few CAM-related tips for both tenants and landlords.
CAM charges vs operating expenses
The terms CAM charges and operating expenses are sometimes used interchangeably. It is important to know that although the two are connected, they are not the same. Operating expenses refer to the costs of maintaining and running a commercial property. CAM charges, however, are the amount of the tenant’s share of operating expenses incurred for common areas. Tenants pay CAM charges to property owners.
Types of CAM structures
The terms of the lease agreement determine the proportion of property taxes and maintenance costs that the tenant pays. The agreement also stipulates whether the CAM fees remain fixed or if they will increase over the years. The lease typically describes how annual increases are calculated in the latter case. Here are three common CAM structures used in commercial real estate leases:
Fixed CAM
CAM fees can be fixed or variable. If the agreement says they are fixed, the tenant is responsible for paying a particular amount to the landlord every month towards the costs connected with the common areas of the property. This amount remains unchanged from month to month.
It gets complicated if CAM charges are variable. When commercial real estate leases have a variable CAM structure, the tenant’s CAM fee calculation could work in several ways. The following paragraphs describe two methods:
Year-over-base cumulative cap
This method of calculating CAM expenses permits the landlord to increase the common area maintenance fees for tenants by a fixed percentage over the base year. This fixed percentage is referred to as the yearly cap.
Let us understand the year-over-base cumulative cap methodology with an example:
- The lease agreement lays down a year-over-base cumulative cap of 5%.
- The CAM charges for the tenant are $10,000 per month in Year 1.
In Year 2, the landlord can increase CAM expenses by a maximum of 5% per month. Consequently, the charges could rise to $10,500 per month ($10,000 + 5% of $10,000) in Year 2. In Year 3, the CAM expenses can rise to $11,000 ($10,000 + 5% of $10,000 for Year 2 and 5% of $10,000 for Year 3) at most.
Year-over-base compounding cap
This method increases CAM expenses at a slightly higher rate as every year’s rise is calculated as a percentage of the previous year’s charges.
Continuing with the example from the earlier paragraph:
- The lease agreement lays down a year-over-base compounding cap of 5%.
- The CAM charges for the tenant are $10,000 per month in Year 1.
In Year 2, the charges could rise by 5%, totaling to $10,500 monthly. In Year 3, they can increase to $11,025 ($10,500 + 5% of $10,500).
Types of leases that include common area maintenance fees
The lease agreement determines whether the tenant pays CAM charges and, if so, their calculation method. At this stage, it is pertinent to point out one lease type – the Full Service Gross Lease. In this method, the landlord pays all expenses, including property taxes, maintenance costs, and property management fees. In this type of lease, the tenant only pays a monthly rental amount.
Another method is a net lease, which works differently from a Full Service Gross Lease. In a net lease, the tenant pays a monthly rental amount and, in addition to this, a share of the common area expenses. These expenses could include property taxes, maintenance, and other operating costs.
One variant of the net lease is the Triple net lease (NNN), which calls for the tenant to bear taxes, maintenance fees, insurance, and monthly rent. Landlords who own office and retail properties often prefer to sign triple net leases where the tenants pay most property-related expenses. In this type of lease, actual operating costs are passed on to the tenant, ensuring the property’s net operating income earned by the landlord remains stable.
How are CAM charges calculated?
If CAM charges are payable as a fixed fee, the tenant is responsible for paying a fixed sum every month. This sum is stipulated in the lease agreement. Tenants should look into the method for calculating charges and ensure that the sum computed is fair before they sign the agreement.
However, the more common approach is to calculate CAM charges based on the square footage occupied by each tenant. Let us understand how this works with an example:
As you can see from the above example, the total square footage of the property or the gross leasable area is 10,000 square feet. The yearly total CAM expenses are $25,000. Tenant A occupies 1,000 square feet or 10% of the gross leasable area and pays 10% of the yearly total CAM expenses.
What is included in CAM charges?
Before signing the lease agreement, tenants must understand what is included in CAM expenses. As a rule, CAM charges include the sums the landlord spends to maintain shared spaces. Capital expenditure is usually excluded. However, repairs, utilities, insurance, and security costs are typically passed on to tenants.
You should remember that inclusions and exclusions in CAM charges could also depend on the type of commercial property. The following section outlines the CAM expenses typically included for office, retail, and industrial properties:
| Office Properties | Retail Properties | Industrial Properties |
| – Administrative and management fees – Janitorial services – Common area lighting – Taxes – Stairwell maintenance – Parking lot maintenance – Security of the premises – Elevators | – Common area lighting – Loading docs – Delivery areas – Hallways – Bathrooms – Parking lot maintenance – Landscaping – Administrative and management fees | – Administrative and management fees – Security – Lighting – Loading docs – Delivery areas – Taxes – Parking lot maintenance |
NOTE: The lists are representative and not exhaustive. Additionally, some expenses will appear in two or even all three lists.
Tips for tenants to ensure their CAM rate is fair
It is hard to define CAM expenses. Consequently, when you are in the process of renting commercial premises, you must gather as much information as possible about the costs that are going to be passed on to you. Here are some of the steps you can take to minimize CAM fees:
Ask for a CAM history
Make the time to know what you are getting into. Request the landlord to provide details of the CAM expenses paid by tenants in the last few years. If CAM expenses have been rising recently, try to understand the reasons for the increase.
Are the higher charges justified? Are the amenities in the building commensurate with the CAM expenses? Most importantly, check the line items that make up the CAM charges. Making further inquiries may be a good idea if capital expenses are included. A little digging at the initial stages can save you from unpleasant surprises later.
Inquire at nearby buildings
Try to gather information about CAM charges paid by tenants in neighboring buildings. The data you collect may not be strictly comparable, but it will give you an idea of the charges you should expect to pay.
Negotiate with the landlord
Don’t unquestioningly accept what the landlord tells you. Consider the figure proposed by the landlord as the first step in the negotiation process. The specific steps you can take are:
- Ask for a lower percentage increase in yearly CAM charges
- Request for a cap on management fees
- Insist on the exclusion of capital expenditures
Review the lease agreement
It is best to seek professional help to check the agreement. The fees you pay your lawyer for this service may be a small fraction of the amount you can save if there is an unfavorable clause in the lease agreement.
CAM tips for landlords
Landlords would do well to pay attention to the subject of CAM charges. It is an area that your tenants will be looking at closely.
As a landlord, you must maintain the common areas well and at the least possible cost. If you overspend and the lease agreement does not allow you to recover the expenditure from your tenants, it could lower your property’s net operating income.
Consider taking the following steps:
- Try to minimize maintenance fees even if all or a large part of the sum is recoverable from your tenants.
- Remember that maintenance planning is essential. Keep the saying – a stitch in time saves nine – in mind. Preventive maintenance can help keep your property in good condition while preventing breakdowns and the need to spend large sums on major repairs.
The bottom line
Common area maintenance charges deserve close attention from both landlords and tenants. Landlords should work towards minimizing costs and, at the same time, keeping the property in the best possible condition. Tenants must monitor the expenses being passed on to them with an eagle eye. Additionally, both need to select the CAM structure carefully and ensure that the CAM expenses are calculated correctly and in accordance with the terms of the lease agreement.
