If you discuss commercial lease management and any associated costs, you’ll likely hear about Common Area Maintenance (CAM) charges. These charges are essential to a lease and significantly impact the property’s net operating income (NOI). They also impact the amount a tenant will pay to occupy the space.
CAM charges (sometimes referred to as additional rent) are a common term seen on many commercial leases and in various transactions. CAM is one of three charges associated with operating expenses. The other two charges referred to in operating expenses are insurance and taxes. We will discuss these more later. CAM charges are the expenses the property owner charges back to the tenant for maintaining a common area to all tenants. There are many factors related to CAM. Understanding how this relates to any contract or lease agreement is critical before entering a commercial property lease agreement.
Components of CAM Charges
When discussing the components of CAM charges, it’s essential to understand what is typically included in these expenses. In commercial properties, the pro-rata share shows how much each tenant pays for shared costs. These shared costs change based on the specific lease type. But, in an NNN lease, these shared costs include an assortment of categories, including:
- Maintenance and Repairs: This includes costs for routine maintenance, landscaping, parking services, and any necessary repairs to common areas.
- Utilities: CAM charges often cover shared utilities such as water, electricity, and gas for common areas. This ensures these essential services are maintained.
- Property Management Fees: These charges are paid to property management companies for supervising the property, managing tenant interactions, and ensuring proper maintenance.
- Insurance Costs: This includes property insurance covering common areas and liability insurance to protect against potential claims.
- Property Taxes: These are the annual taxes associated with the property.
Different properties have their own unique needs, and the tenants often share the costs associated with them. This could include on-site management, security, or other expenses required to manage and maintain the commercial property. To explore what the right commercial lease for your tenant is, learn about commercial lease covers and the pros and cons of each.
How CAM Charges are Calculated
Calculating CAM charges is based on the tenant’s pro-rata of the space.
Step 1: Tenant’s rentable square footage / Total leasable square footage = the pro-rata percentage of CAM charges the tenant is responsible for.
Step 2: Take the pro-rata percentage of CAM charges, Insurance, and Taxes X the property’s estimated annual CAM, Insurance, and Taxes = Tenants Annual Budget for CAM Charges, Taxes, and Insurance.
Alternatively, you can calculate your Annual CAM, Insurance, and Tax Expenses / Property square footage = CAM, Insurance, and taxes fee per square foot.
Either way, you do this, the tenant is responsible for their portion of the space they occupy. Every lease is slightly different. This difference is especially true between N, NN, and NNN leases in terms of what may or may not be allowed to be included in those CAM charges. Pay close attention to the language.
An Example of CAM Charges and the Allocation
The property manager will estimate annual CAM and operating expenses at the start of the year. The costs are then divided among the tenants in the building by their gross leased area.
- If you lease a 1,000-square-foot (SF) retail space in a 5,000-SF building, the tenant will be responsible for 20% of the CAM charges and other operating expenses.
Your annual CAM rent estimation portion is divided by 12 and added to your monthly rent. Your property manager will conduct a CAM reconciliation at the end of the year.
Addressing CAM Charges and the Differences in NNN, Modified Gross, and a Full Service Lease
In a full-service gross lease, the tenant pays a fixed monthly payment, including rent and CAM charges. Because the CAM charges are fixed, commercial landlords risk underpayment of CAM fees and, therefore, lost income. When you pay CAM as a percentage of gross leasable area, the calculation becomes more tricky.
Triple Net Leases
In triple-net leases (NNN leases), tenants assume almost all the responsibility for operating expenses. They pay their pro-rata share of property insurance, taxes, and common area maintenance (CAM). The landlord typically only has to foot the bill for capital expenditures. However, the results of lease negotiations can modify tenant responsibilities in a triple-net lease.
Modified Gross Lease
A modified gross lease is when the tenant pays a base rent plus a share of the CAM charges. The landlord takes care of the remaining expenses. This type of lease is often preferred by landlords who want to share some operational costs with tenants but keep the rent amount predictable. In some gross leases, landlords also cover utilities and janitorial services for the tenants.
Full-Service Lease
A full-service lease is typically found in high-rise buildings that have multiple tenants. With this type of lease, most things are included. This ranges from janitorial services for the interior to maintaining an impressive lobby and covering utilities. You’ll generally pay a portion of the building’s operating expenses that corresponds to the size of your space and its location within the building. It’s a good idea to discuss estimated pro-rata expenses with your landlord to get a clear understanding.
Triple Net (NNN) vs. Modified Gross Lease
The difference between a triple net lease (NNN) and a modified gross lease is how expenses are handled. With triple-net leases, you generally pay a lower base rent. However, you also take on additional costs separately, such as property taxes, insurance, and maintenance.
On the other hand, modified gross leases combine both gross and net leases. The base year rent includes certain expenses over a year, but any increase over a year will be charged to the tenant. This covers balancing managing expenses between predictability and flexibility.
Negotiating CAM Charges
When negotiating CAM charges as a landlord, key strategies include setting a clear breakdown of included expenses. Establishing a base year for calculations is also important. Offering a cap on total CAM charges and providing tenants with the right to audit expenses is essential. Considering a percentage-based allocation system based on occupied space or usage ensures fairness across tenants. Always maintain transparency and open communication to avoid disputes.
It’s essential to look into comparable properties (or properties within your portfolio) to ensure your CAM charges are competitive. Additionally, regularly providing your tenants with a detailed breakdown of CAM expenses can help maintain transparency. This may prevent misunderstandings or any disputes. Many leases require this to be done within 60 – 120 days from the beginning of the year. However, most leases require this reconciliation to be completed within 90 days.
Using a Commercial Lease Calculator
The way CAM charges are calculated can differ based on the lease agreement. This is usually done through what’s called the tenant’s pro-rata share. This share reflects each tenant’s space in the total leasable area.
To find a tenant’s pro-rata share, you divide the square footage of their rented space by the total square footage of the entire property. After that, you multiply this percentage by the overall CAM expenses for the building.
It’s also important to mention that some leases might have a “cap” on CAM charges. This means there’s a limit on how much a tenant is charged for these expenses, no matter what the actual costs are for the landlord.
Manage Your CAM Charges with STRATAFOLIO
CAM charges are a critical component of most commercial lease agreements. To properly track CAM charges, it is recommended that property management software like STRATAFOLIO. With STRATAFOLIO, you can easily track, calculate, and reconcile CAM charges. Additionally, the information in STRATAFOLIO is integrated with QuickBooks to generate complete and accurate reports.
Schedule a demo to experience our CAM 1-click functionality. Don’t miss the chance to elevate your commercial property management experience!
