When it comes to commercial real estate, there are various mechanisms that property owners or landlords use to recover common area maintenance (CAM) costs from their tenants. One of these mechanisms is the use of CAM caps. In this blog post, we will explore the different types of CAM caps commonly found in commercial real estate and their implications for both landlords and tenants.
What are CAM caps?
CAM caps help define the maximum amount a tenant is responsible for their share of the expenses. It’s important to understand that owners can outline which caps they intend to use for each tenant, which can vary from one tenant to another. That’s part of why it’s so important to have automation software that helps keep track of it all for you. The last thing you need is a tenant to dispute their charges through litigation.
What types of CAM caps are There?
Absolute CAM caps establish an upper limit on the amount a tenant has to pay for CAM expenses. Sometimes referred to as a Cumulative CAM cap, once the CAM costs exceed the cap, the landlord becomes responsible for covering the additional expenses. This type offers tenants protection from significant increases in CAM expenses, making their financial obligations more predictable. Landlords, on the other hand, may hesitate to implement absolute caps as they assume the risk of any additional CAM expenses beyond the cap.
Percentage CAM caps are defined as a percentage of the tenant’s base rent. This means that the tenant’s CAM expense is directly proportional to their base rent. For instance, if the CAM cap is set at 5% and the base rent is $10,000 per month, the tenant’s maximum expense would be $500 per month. This cap type has the advantage of distributing the costs fairly based on the tenant’s overall financial commitment to the property.
Hybrid CAM caps combine elements of both absolute and percentage styles. They set a specific fixed dollar amount (the absolute cap) and also a percentage of the tenant’s base rent. In this case, the tenant pays the lesser of the two amounts. Hybrid caps aim to strike a balance between the predictability of absolute caps and the proportionality of percentage caps.
Indexed caps are tied to an external economic index, such as the Consumer Price Index (CPI). The cap amount adjusts automatically based on changes in the selected index. This type allows for the fluctuation of CAM expenses in line with general economic conditions. Indexed caps offer both landlords and tenants a degree of protection against unexpected inflation or deflation.
Managing leases and CAM caps
Commercial real estate owners should be prepared for tenants to negotiate the expenses and CAM caps within their lease agreement prior to them signing. But, laying the foundation and having clear expectations from the beginning will help alleviate any future disputes when it comes time to reconcile.
After the lease is signed, STRATAFOLIO makes it possible for commercial real estate owners to easily manage the CAM process. During onboarding, we take the CAM caps that are in your current leases and map the software to reflect it as outlined. Then, when it comes time to reconcile, you can do so in the click of a button. No more spreadsheets, no more month’s-long reconciling. Contact us for a demo!