What Are CAM Charges?
What Are CAM Charges?
One of the most common questions after going through a commercial real estate Triple Net Lease (NNN) is “What are CAM charges?” CAM stands for common area maintenance. CAM charges are pro-rata charges, paid by tenants, included in leases to compensate/reimburse landlords for costs incurred to operate, maintain, and repair the property.
How Are CAM Charges Calculated?
The CAM charge is calculated by taking the tenant’s total square footage (SF) and dividing it by the property’s total gross square footage, then multiplying this by the property’s total estimated common area maintenance expenses.
The annual total estimated CAM charge is usually budgeted at the beginning of the year as part of the property’s annual budget. At the end of the year, the CAM charges incurred by the tenant may be reconciled (see “Reconciliation of CAM Charges” section below).
CAM Charge = (Tenant’s SF / Property Gross SF) x Total Estimated CAM
Examples of CAM Charges
Operating Expenses – (may differ by property type):
Parking lot repair and maintenance.
Landscape expenses.
Common area utilities
Office – commonly metered across entire building.
Retail/Industrial – commonly sub-metered.
HVAC repair and maintenance.
Property taxes.
Marketing/advertising to promote the building.
Insurance.
Management fees.
Janitorial services.
Office – commonly included.
Retail/Industrial – normally excluded, or individually contracted by tenants.
Security.
Capital Expenditures:
HVAC replacement.
Roof repairs and replacement.
Parking lot repaving/resurfacing.
CAM Structures
Fixed CAM charges– a fixed CAM charge (no changes over course of year). This results in no year-end reconciliation, which allows tenants/landlords to avoid the cost of a year-end reconciliation, as well as make budget projections easier/more accurate. Usually landlords will estimate expenses on the higher end of the spectrum, in case they incur any unexpected large costs. Tenants will eat the higher cost to trade for the increased certainty.
Variable CAM charges – a CAM charge that is subject to change over the course of year. Variable CAM charges are based on a number of factors. Landlords/tenants will often require a year-end reconciliation for variable CAM charges to ensure the costs borne by both parties are accurate.
Caps
Base Year Stop: All reimbursable CAM charges are paid by the tenant based on their pro-rata share of the property SF over a stop amount, i.e. actual amount annual reimbursable CAM charges in base year of lease (1st year of lease).
Base Year Stop -1: All reimbursable CAM charges are paid by the tenant based on their pro-rata share of the property SF over a stop amount, i.e. actual amount annual reimbursable CAM charges in year prior to base year (1st year of lease).
Base Year Stop +1: All reimbursable CAM charges are paid by the tenant based on their pro-rata share of the property SF over a stop amount, i.e. actual amount annual reimbursable CAM charges in year after base year (1st year of lease).
Stop Amount: All reimbursable CAM charges are paid by the tenant based on their pro-rata share of the property SF over a stop amount.
Inflation cap: limits the percentage CAM charges can increase annually. For example, if you negotiate a 3% inflation cap, then CAM charges cannot increase by more than 3% of the prior year’s CAM charges.
Reconciliation of CAM Charges
At the end of the year, the landlord/property manager will determine the actual cost of CAM charges incurred over the course of the year. If the tenant has paid less than their pro-rata share of the actual CAM charges, then they may be charged an overage amount. If the tenant has paid more than their pro-rata share of the actual CAM charges, then they may be credited the excess amount paid. It may be possible to negotiate the right to see detailed invoices/statements related to CAM charges incurred by the tenant, especially for major charges or capital expenditures passed through. If you have the right to request these statements, make sure you know how long you have to request the statements. For example, the tenant may be required to request the invoices within 30 days of the landlord receiving audit/reconciliation documents, otherwise the tenant waives the right to the detailed invoices.
Lease Language & CAM Charges
Landlords and tenants both need to be able to budget future expenses with some certainty. It is important to be clear and specific with the language surrounding CAM charges in leases, so that you avoid any unwelcome/unexpected expenses.
The following steps can help you avoid the common pitfalls associated with negotiating CAM charges in leases:
Detail every expense that “CAM charges” will cover in your lease.
Detail how often the CAM charges are to be incurred (e.g. monthly, quarterly, annually).
Will there be mid-year adjustments to the total estimated annual CAM charges?
If the landlord has determined that CAM charges will be higher mid-year, then adjusting the CAM charges up and paying a little more each month may help the tenant avoid one lump-sum payment at year-end.
Have the landlord list when major capital improvements/capital expenditures were last made, and when they are scheduled to be done in the future.
If discretionary capital expenditures are included as a part of CAM charges, then insist the landlord not be able to make the improvement without the tenant’s prior consent.
Capital expenditures/improvements included as a part of CAM charges, and incurred by tenants, should be amortized over the useful life of the capital improvement (e.g. if the useful life of the improvement is 15 years, but you’ve only signed a 2 year lease, then you don’t want to bear the future costs for something you’re not going to benefit from).
Use a tenant rep broker and/or lawyer to iron out the specifics of the lease.
