What Are CAM Caps in Commercial Real Estate?

What Are CAM Caps in Commercial Real Estate?

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 what CAM caps are and how they are used in the commercial real estate industry.

Understanding CAM Caps

In commercial real estate, common areas such as lobbies, hallways, elevators, parking lots, and landscaped areas are shared by all tenants in a building or complex. These areas require ongoing maintenance and repairs to ensure they are clean, safe, and well-maintained. The cost of maintaining these common areas is typically shared among the tenants 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. This means that once the total CAM expenses exceed the predetermined cap, tenants are not required 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 help create transparency and fairness in allocating maintenance costs, ensuring tenants are not burdened with excessive expenses. 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 for 6% annually and the increase for a given year 2 is only 4%, that leaves 2% unused. This unused cap can then be used 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 example, if the non-cumulative cap for landscaping was set at 5% and the expenses do not reach that, the landlord cannot recover that 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.

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What Are CAM Caps in Commercial Real Estate?
Article Name
What Are CAM Caps in Commercial Real Estate?
Description
Exploring Common Area Maintenance Cap: Find out how CAM caps work and why they matter for tenants in shared spaces.
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STRATAFOLIO
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