When it comes to commercial real estate, property owners or landlords use various mechanisms to recover common area maintenance (CAM) costs from their tenants. One of these mechanisms that may be written into a lease 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?
1. Percentage
Percentage CAM caps are when the tenant’s CAM can increase by no more than a specified percentage. Let’s look at an example of a tenant and landlord agreeing on a 7% annual cap on property management. This means in the following year, the increase for property management cannot exceed 107% of the previous year. CAM caps provide tenants with financial predictability and protection from unexpected spikes in CAM expenses. These are the most common caps that are added to a commercial real estate lease.
2. Absolute
Absolute CAM caps establish an upper limit on the amount a tenant has to pay for CAM expenses. Once the CAM costs exceed the cap, the landlord becomes responsible for covering the additional expenses. This type protects tenants from significant increases in CAM expenses, making their financial obligations more predictable. On the other hand, landlords may hesitate to implement absolute caps as they assume the risk of additional CAM expenses beyond the cap.
3. Hybrid
Hybrid CAM caps combine elements of both absolute and percentage styles. They set a specific fixed dollar amount (the absolute cap) and also an increase of CAM up to a certain percentage of increase. In this case, the tenant pays the lesser of the two amounts. Hybrid caps aim to balance absolute caps’ predictability and percentage caps’ proportionality. This is very uncommon but is a possible variation of caps that may be written in a lease.
4. Indexed
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. These are the most challenging to calculate, so they are rarely used.
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 before their signing. However, laying the foundation and having clear expectations from the beginning will help alleviate any future disputes when it comes time to reconcile.
After signing the lease, STRATAFOLIO allows commercial real estate owners to manage the CAM process easily. During onboarding, we take the CAM caps in your current leases and map the software to reflect them as outlined. Then, when it comes time to reconcile, you can do so with the click of a button. No more spreadsheets, no more month-long reconciling. Contact us for a demo!
