Imagine a typical retail shopping center. There is an anchor tenant and a number of supporting tenants whose businesses are housed in connected retail storefronts. These storefronts represent the Gross Leasable Area.
In this shopping center, there is also a parking lot, landscaping, walkways, elevators, and lobbies that are shared by all tenants. These spaces are referred to as “common areas” and the responsibility for their upkeep is addressed in commercial real estate tenant leases in a section called Common Area Maintenance Charges.
What Are Common Area Maintenance Charges?
Common Area Maintenance Charges or CAM Charges are additional fees (above base monthly rent) paid by tenants to landlords to cover the costs associated with the maintenance of common areas in a commercial real estate property.
Types of CAM Charges
Generally, CAM charges fall into one of two categories, controllable expenses or uncontrollable expenses.
What are Controllable Expenses?
Controllable expenses are those that can be controlled by the commercial real estate property manager and/or owner. Examples include things like payroll and commercial real estate management.
What are Uncontrollable Expenses?
As the name suggests, uncontrollable expenses are those for which the commercial real estate property management company or owner has no control. These could vary from month to month based on usage and include things like utilities and snow removal.
What is Included in CAM Charges?
CAM expenses include the cost of repairing, maintaining, and cleaning the common areas of a commercial real estate property. The specific costs are determined by the real estate landlord and outlined in the tenant leases for the property. They can vary widely from one property to another, but there are a number of examples that are common:
Parking Lot Maintenance
CAM charges pay for the costs of sealing parking lots, repairing their cracks, and resurfacing them when needed.
Lawncare and Landscaping
If the commercial real estate property includes a significant amount of landscaping, it can be expensive to maintain. CAM charges for landscaping can include things like: mowing the grass, pulling weeds, trimming the trees and maintaining the sprinkler/irrigation system.
Ensuring that sidewalks are free of snow and ice and repairing broken sections is a safety issue. It is in the best interest of both the tenants and the owner to ensure they are kept in top shape for the comfort and enjoyment of all shoppers.
If the utilities for a commercial property are not separately metered, then it is customary for the tenants to split the cost.
There are other CAM charges than those mentioned above and the tenant’s lease should be read in detail to determine which are addressed.
How Are CAM Charges Calculated?
The most important point to remember about the calculation of CAM charges is that they can be different for every tenant and the specific calculation methodology is described within the lease. That said, the calculation of CAM Charges is typically based upon proportion of the total space that a given tenant occupies.
For example, suppose a property has 50,000 SF of Gross Leasable Area and one tenant occupies 10,000 SF or 20% of the total space. So, if total CAM charges were $100,000, the tenant’s proportionate share would be 20% or $20,000.
Do All Leases Include CAM Charges?
In short, no. The existence of CAM charges depends on the type of lease. Broadly, there are two types of commercial real estate leases, Net and Gross.
CAM Charges in a Net Lease
In a Net Lease, the tenant is responsible for paying a base monthly rental amount plus some portion of the commercial property’s operating expenses, depending on the specific type of Net Lease:
- Single Net Lease: In a single-net lease, the tenant pays the base monthly rental amount plus one of the three major operating expense categories, taxes, insurance, and maintenance.
- Double Net Lease: In a double net lease, the tenant pays their base monthly rental amount plus two of the three major operating expense categories: taxes, insurance, and maintenance.
- Triple Net Lease (NNN Lease): In a triple net lease, the tenant pays a base monthly rental amount plus all three of the major operating expenses categories: taxes, insurance, and maintenance.
CAM Charges in a Gross Lease
In a Gross Lease structure – sometimes called a full-service lease – the tenant pays a fixed monthly rental amount and the real estate landlord pays for the commercial property’s operating and maintenance costs. As a result, the base rental amount tends to be higher so the real estate owner can recoup as much of the maintenance costs as they can.
In other words, a Gross Lease does not include excess CAM charges, they are built into the monthly rental amount.
Underwriting Implications of CAM Charges
A typical proforma for a commercial real estate property will show two major income line items: Rental Revenue and CAM Reimbursements. As such, understanding how much revenue to expect from CAM charges is critically important to creating an accurate financial model for the property and a realistic estimate of value.
The commercial property’s income is offset by the operating costs of maintaining it and the cash left over is known as “Net Operating Income.” The amount of NOI that a property produces is a primary driver of value and returns for the investment. So, if CAM reimbursements are modeled too low, NOI would also below, which would also skew returns low. Conversely, if CAM reimbursements are too high, the property’s NOI returns, and value could be overstated.
For this reason, it is important to review every tenant lease to understand how much they are required to pay in monthly rent and how much they are required to pay in monthly CAM charges.
Conclusions & Summary
Common Area Maintenance Costs are costs that are passed on to commercial real estate tenants to reimburse the owner for the expenses associated with maintaining the common areas of a property.
The methodology used to calculate Common Area Maintenance Fees is outlined in each commercial real estate lease and it can vary from one property to another. However, the most common method is to allocate these costs to each tenant based on their pro-rata share of the total square footage in the property.
CAM Fees are typically seen in Net Leases where the tenant is responsible for paying a monthly base rent amount plus their share of the CAM Costs. In a Gross Lease, tenants pay one monthly rental amount and the landlord is responsible for paying the common area expenses.
From an underwriting standpoint, understanding which costs the tenants are and aren’t responsible for reimbursing can have major implications for the creation of the property proforma. If they are understated, the returns would skew low. If they are overstated, returns could skew high.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
When evaluating our own deals, we invest a significant amount of time and resources in analyzing a property’s cap rate relative to other options. We view this as integral to our pre-purchase due diligence process and a factor in our success. If you would like to learn more about our investment opportunities, contact us at (800) 605-4966 or email@example.com for more information.