- A property’s common areas are defined as the spaces and services that benefit all tenants. Examples include hallways, elevators, landscaping, snow removal, lobbies, security, and parking lots.
- Responsibility for the costs associated with maintaining common areas and services is dependent upon the specific lease structure.
- In a Gross Lease, the tenant pays one monthly amount and the property owner is responsible for operating and CAM expenses.
A typical commercial property has a number of units, storefronts, spaces, or industrial bays that can be leased by a business. In return for the opportunity to occupy the space, the business pays a monthly rental fee.
However, a typical commercial property also has a number of “common areas” that are used by all tenants, as well as services from which all tenants benefit. These include amenities like elevators, parking lots, lobbies and break rooms, as well as snow removal, landscaping, janitorial services. Given that these spaces and services affect all tenants, it is only natural to ask who is responsible for the costs associated with them.
Common Area Maintenance Explained
Common Area Maintenance Fees, sometimes referred to as simply “CAM” or “CAM Charges,” are the costs associated with the operation and upkeep of a property’s common areas and services. They are one of the three major components that make up a property’s total operating expenses, the other two being taxes and insurance.
In order to understand who is responsible for paying for the CAM charges, it is first important to understand the two major commercial lease types.
Gross Lease vs. Net Lease
At a high level, there are two major types of commercial leases: gross and net. It can be helpful to think about these as being on opposite ends of a spectrum.
On one end, a Gross Lease has a payment structure where the tenant makes one monthly payment and the landlord is responsible for all of the property’s operating expenses. This arrangement makes it easier for the tenants because they just have to pay one monthly amount. But, the monthly rent is usually higher because the property manager uses some portion of it to offset the operating expenses.
On the other end of the spectrum is a Net Lease, where the tenant pays a lower monthly amount plus some portion of the property’s operating expenses. This structure gives the tenant a lower base rental amount, but it also exposes them to the risk of rising operating costs.
In reality, the payment structure of most commercial real estate leases falls somewhere between these two ends of the spectrum. In a so-called “modified gross lease,” the tenant pays a base rent amount plus their pro rata share of the CAM expenses.
How Are Common Area Maintenance Charges Calculated?
At the beginning of each year, the property owner creates an operating budget for the property. Their figures are based on historical performance and their knowledge of existing service contracts and expense amounts.
Once the budget is complete, the total cost is allocated to each tenant based on the amount of square footage that they lease in the property. The exact formula used to calculate CAM costs for each tenant is defined in the lease agreement, but the formula generally looks like this:
For example, assume that a property has 20,000 square feet of Gross Leasable space and that one tenant leases 4,000 SF of that space. Also assume that the property owner has created a budget that indicates $100,000 in total operating expenses for the year.
To get the tenant’s pro rata share, the leased square footage of 4,000 SF is divided by the building’s total square footage of 20,000. The resulting percentage is 20%. This percentage can be multiplied by the total operating budget of $100,000 to get $20,000. Finally, $20,000 can be divided by 12 months to get $1,666 per month.
So, the result of this calculation means that the tenant will pay a base rent amount plus $1,666 per month to cover their share of the CAM fees.
At the end of each year, the property owner will tally up the exact operating expenses. If they are less than the budget (meaning they collected too much money from the tenants), they will issue a credit to the tenants to offset future CAM charges. If they turn out to be more than the budget, they work to collect the difference from the tenant(s).
Why CAM Charges Matter
The amount, timing, and payment of CAM charges matter for both the tenant and the property owner.
For tenants, CAM charges can make up a significant portion of their monthly rental expense. So, it is important that they budget for both the monthly rent and CAM charges so they know what their total monthly expense will be.
For the property owner, CAM charges are important because they represent an additional source of income that is used to pay for the property’s operating expenses. This limits the amount of money that has to come out of their own pocket
In the case of the properties that we own and manage, we invest a significant amount of time and resources into the capital budgeting process to ensure it is as accurate and fair as possible. And, we work with all of our tenants to ensure they understand how their rental payment is calculated, and how it can change in any given year due to increases in operating costs.
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.
To learn more about our real estate investing opportunities, contact us at (800) 605-4966 or email@example.com for more information.
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