CAM charges describe the expenses a commercial property owner bills back to tenants in return for maintaining shared spaces. CAM is one of the most important concepts to grasp in commercial leasing. Clean and beautiful common areas can create a competitive advantage for tenants. As such, landlords typically split common area maintenance costs among tenants.
What are CAM charges?
CAM stands for ”common area maintenance” and describes the expenses associated with maintaining spaces that tenants share in a commercial property.
Consequently, CAM charges describe the practice of billing tenants for the landlord’s cost of maintaining common areas.
CAM is also synonymous with expense recoveries.
What costs are in CAM charges?
In short, it depends. Common area maintenance line items will differ between different asset types.
The below graphic shows typical CAM costs for retail, office, and industrial real estate assets.
Keep in mind that all fees are negotiable in the terms of your lease.
What types of leases include common area maintenance fees?
Not all commercial leases treat common area maintenance equally. Some leases pass little to no costs to tenants, while others pass all costs to tenants.
Full-service gross lease
A full-service gross lease consists of a fixed monthly lease payment. The lease payment typically covers all common area maintenance, utilities, taxes, and other operating costs. In a full-service lease, landlords retain the risk of unpredictable costs. Consequently, the rent payment in a full-service gross is typically higher than that of a net lease.
In a net lease, tenants pay CAM, utilities, taxes, and other property-related costs in addition to their monthly rent payment. As such, the monthly lease payment is typically less than that of a full-service gross lease.
How do you calculate CAM charges?
Common area maintenance is commonly charged in one of two ways:
- Fixed fee, or
- Tenant’s percentage of the total gross leasable area
Fixed fee CAM charges are self-explanatory. An annual CAM charge is built into the lease, and tenants are responsible for paying it along with their rent. Fixed fee CAM charges are common in small properties with “mom and pop” owners.
When you pay CAM as a percentage of gross leasable area, the calculation becomes a bit more tricky.
At the start of the year, your property manager will estimate annual CAM costs. The costs are then divided among the tenants in the building by their gross leased area. For example, if you lease a 1,000 SF retail block in a 5,000 SF building, you would be responsible for 20% of the CAM costs.
Your portion of the annual CAM estimation is divided by 12 and added to your monthly rent.
At the end of the year, your property manager will conduct a CAM reconciliation.
What is CAM reconciliation?
A CAM reconciliation is an annual calculation that compares a property’s actual CAM costs and tenant receipts. When actual CAM costs are less than tenant receipts, a distribution is made to tenants for the difference. When CAM costs are in excess of receipts, tenants owe the difference to the landlord.
Some leases require a CAM reconciliation to present all common area maintenance invoices to the tenant for verification. Property owners may wish to not include such strict stipulations.
You’ll hear property managers complain about CAM reconciliations. Different lease provisions can complicate the calculation.
Property owners and tenants can negotiate when CAM charges are due – monthly, quarterly or yearly.
Talented property managers will be able to predict if CAM is running high for the year and proactively adjust monthly CAM costs upward to prevent a large shock at the end of the year.
What are CAM Caps and Floors?
Building occupancy and unexpected costs can create major variability in common area maintenance charges. Variability can create financial stress for tenants – this is where CAM caps and CAM floors come in.
A CAM Cap is a commercial lease provision that creates an upper limit on annual CAM charges for a tenant.
Inversely, a CAM floor is a commercial lease provision that creates a lower limit on annual CAM charges for a tenant.
CAM cap and CAM floor provisions typically include an escalation rate that allows for inflation over time.
CAM tips for tenants
Common area maintenance reconciliations occur annually. Your property manager will provide you with a summary of common area maintenance and operating costs for the prior year, including any over or underpayment. Property managers may include costs that aren’t identifiable, so it’s important to ask your property manager to clarify the costs per your lease.
Common area maintenance charges are typically the most negotiated parts of a lease. Be intentional about negotiating language that is favorable to you as the tenant.
Keep an eye on employee salaries. You shouldn’t pay the full salary for a maintenance person who spent 30% of their time at the property.
CAM tips for landlords
Control maintenance costs, especially if your leases have CAM caps.
Conduct regular inspections of the property, looking for potential maintenance issues. Use preventative maintenance schedules to avoid surprises.
Controlled Costs vs Uncontrolled Costs
Uncontrollable costs describe those that are incurred regardless of property operations. Examples of uncontrollable costs include property taxes, insurance, utilities, and snow removal.
Controllable costs describe all other costs, like salaries and maintenance.
Are utilities in CAM?
Utilities are sometimes included in common area maintenance. Electric, gas, and water costs for common area amenities are typically included in CAM charges. Utility charges are most relevant for office and retail properties where you have more common spaces.
Are capital expenditures in CAM?
This is a hot-button issue.
In most cases, capital expenditures should not be in common area maintenance. Capital improvements are typically part of a landlord’s cost of ownership.
However, capital expenditures can be in common area maintenance when they directly reduce a tenant’s CAM charges. For example, the cost of a more efficient HVAC unit could be in CAM if it reduces the annual CAM costs with cooling the building.
Inversely, a new roof, though benefiting tenants, doesn’t help reduce their CAM charges. It shouldn’t be in CAM costs.
Are insurance costs in CAM?
Property insurance costs are typically in CAM charges.
Changes in insurance costs are predictable. If vandalism is increasing on your building, the cost of insurance might be increasing.
Are real estate taxes in CAM?
Like insurance, real estate taxes are typically borne by tenants. In some leases, the cost is in CAM. Other leases list real estate taxes as a separate item.
However, tenants can help influence real estate taxes by encouraging their landlords to appeal tax assessments.
Are administrative and property management fees included in CAM?
Yes, administrative and property management fees are typically in CAM. In addition, management salaries will also be in common area maintenance. When property management staff serves multiple assets, a fractional salary will be in CAM costs.