Many businesses lease commercial real estate; aside from the rental fees, there are also CAM charges, which, if not understood properly, can come as a shock additional charge. Therefore, it is essential to understand what CAM is and how it is applied in a lease agreement.
As it infers, common area maintenance, or CAM, is the charges incurred by tenants for the shared areas. CAM amounts are usually determined by the rental space size and are billed monthly or annually. Terms need to be identified and understood before signing the lease agreement.
We have put together everything you may need to know about CAM and what needs to be considered with regard to CAM charges to help you more easily understand and navigate these perceived additional costs.
CAM In Commercial Real Estate: A Tenant’s Guide To Additional Costs
If you are starting out leasing commercial real estate, you may find numerous additional expenses you weren’t initially counting on. The odd extras can creep up even if you’ve been in commercial real estate for many years.
CAM is one of the additional costs, and it is something that, if understood, will allow you to assess the financial feasibility of the space you are leasing more accurately. Businesses need to have the right surroundings to work with their brand. This can have an impact on the type of commercial real estate you want to lease and, more importantly, the CAM charges that may follow.
Maintaining common areas is a necessary expense, but if you haven’t fully understood the terms of your lease agreement, CAM can often hide several scary additions.
We will unpack what CAM is and what could be included in its definition so you know which questions to ask before signing your lease.
What Is CAM In Commercial Real Estate?
CAM is an acronym for common area maintenance. It’s an additional cost to the lease rental and is included to cover the essential care and wear and tear of common areas shared by other tenants.
These costs can include shared building areas, parking lots, and even garden areas if your commercial property consists of these.
The types of costs that CAM can include are as follows:
- Insurance
- Repairs
- General maintenance
- Security
- Administrative costs
- Pest control
- Property taxes
It is, therefore, essential to go through your lease agreement carefully and negotiate where needed so that your commercial space only ends up costing what is worth for your business needs.
CAM Structures
Landlords have different structures on how CAM is billed. This will depend on the landlords themselves, as well as the expenses and uses of the property. Determining the charges in advance can be pretty tricky and are often estimated.
As a tenant, it’s a good idea to go through the lease agreement’s CAM costs properly to understand what they are and how they are calculated before signing a lease.
Many landlords will require tenants to pay additional fees if the CAM amounts do not meet expenses. Alternatively, they will repay the tenant any excess funds left at the end of a year or use the excess against the CAM costs for the projected year in the tenant’s favor.
It’s essential to know how your commercial real estate’s CAM structures work to avoid unwanted charges at the end of the year or month.
Here are some ways that CAM can be charged:
- It can be charged monthly.
- It can be charged annually.
- It can be fixed where the charge remains the same monthly or yearly.
What Is An Example of CAM Calculation?
Not all spaces within a commercial property are the same; some tenants will have much larger areas than others. In addition to this, one tenant may produce more.
CAM is calculated on a pro-rata basis, where the CAM percentage will align with the percentage of space each tenant is leasing. So, your gross leasable square footage will determine the CAM costs you will incur.
If you have a larger commercial space than your neighbor on the same property, you will pay more CAM, and the inverse is also true.
Suppose a landlord with a total commercial property area of 100,000 square feet pays $ 5,000 in expenses, and the tenant is leasing 40,000 square feet of the 100,000 total. In that case, the tenant will only be responsible for a percentage of the area they are leasing:
40000/ 100000 = 0.4 X100 = 40%
40% of $5000 is $2000, so the tenant would have $2000 CAM charges.
CA VS NNN
CA agreements have the tenant paying over a sum to the landlord for general maintenance, dependent on the lease agreement, amongst other things. The landlord is then, however, the responsible party for ensuring that the work is done on the property.
A N (triple N) lease is where the tenant pays all property expenses, including taxes, insurance, utilities, and maintenance. This also now all falls under the responsibility of the tenant.
Depending on one’s business, either option has pros and cons. With CAM, you can hold the landlord accountable, but inversely, the landlord may fail to fulfill responsibilities. With NNN leases, the tenant has a lot more ability to make decisions on their leased area, and as they are responsible for the upkeep, they can get in contractors they want when needed.
The key is to determine what your business requires and review the lease agreement to see how it meets your needs and expectations. Many companies prefer a NNN option due to its flexibility with their space.
Landlords also like NNN leases because they get reliable tenants, offering a steady income stream with little output on their behalf.
Conclusion
CAM is necessary; no commercial real estate could function without maintenance charges. When getting ready to sign a lease for commercial real estate, always go through the CAM costs and get clarification from your landlord.