When it comes to commercial real estate, there are many terms and concepts that can seem complex and confusing. One such term is CAM caps, which stands for Common Area Maintenance caps. In this blog post, we will explore CAM caps and their use in the commercial real estate industry.
Understanding CAM Caps
Tenants in a building or complex share common areas such as lobbies, hallways, elevators, parking lots, and landscaped areas in commercial real estate. These areas require ongoing maintenance and repairs to ensure they are clean, safe, and well-maintained. Tenants typically share the cost of maintaining these common areas in the form of Common Area Maintenance (CAM) expenses.
CAM expenses can include costs for cleaning services, landscaping, snow removal, security, repairs, and general maintenance of communal spaces. To protect tenants from unpredictable and potentially excessive CAM expenses, landlords often implement CAM caps.
The Role of CAM Caps
CAM caps serve as a limit or cap on the amount of CAM expenses that tenants are responsible for. Once the total CAM expenses exceed the predetermined cap, tenants do not need to contribute any additional funds towards the maintenance of the common areas. Often these caps fall in the 3% to 10% range annually.
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. They create transparency and fairness in allocating maintenance costs, ensuring that excessive expenses do not burden tenants. CAM caps also incentivize landlords to manage and control CAM expenses efficiently.
Cumulative Versus Non-Cumulative
The other thing to consider is whether the cap is cumulative or non-cumulative. A cumulative cap provides flexibility for the landlord. If a cap is set at 6% annually and the increase for a given year is only 4%, that leaves 2% unused. You can use this unused cap in future years. In this scenario, in year 3 of the lease, the increase can increase to 8% as the unused 2% can included as well.
With a non-cumulative cap, the cap is set each year. Whether the increases reach the cap or not, the cap is what it is, and the tenant will not pay more than the agreed-upon increase. For instance, if the landlord set the non-cumulative cap for landscaping at 5% and the expenses do not reach that amount, the landlord cannot recover the unused percentage. Non-cumulative caps are more tenant-friendly.
Negotiating CAM Caps
When entering into a commercial lease agreement, tenants and landlords must understand and negotiate the terms of CAM caps. It is advisable to consult with a commercial real estate attorney or broker who can guide landlords through the leasing process and help negotiate favorable CAM cap terms.
Landlords should consider factors such as the initial CAM amount, the percentage to increase the CAM amount, the frequency of cap adjustments, mechanisms for reviewing and calculating CAM expenses, how disputes regarding CAM expenses will be resolved, and any exclusions to the cap.
Conclusion
CAM caps play a vital role in commercial real estate, providing protection and financial predictability for tenants. Understanding and negotiating the terms of CAM caps are essential for landlords to make informed decisions and protect their interests in commercial lease agreements.
By being aware of CAM caps and their implications, landlords can navigate the complexities of commercial real estate leasing with confidence and make well-informed decisions. Contact STRATAFOLIO to learn more about how we can help you with your common area maintenance.
