CAM charges are common in a triple net (NNN) lease. A NNN lease will pass through 1) taxes, 2) insurance and 3) common area maintenance charges to tenants. Common area maintenance charges represent those expenses the landlord incurs to maintain those portions of the property that (theoretically) all tenants enjoy.
What Is ‘CAM’ or Common Area Maintenance?
CAM charges represent the fee tenants pay to the landlord to compensate the landlord for its maintenance, repair, and operation of the non-exclusive areas of the premises.
What does CAM Cover?
CAM charges vary from lease to lease as there is no uniform definition. Theoretically, CAM will always include the direct costs of maintaining the building and premises, particularly “common areas.” These direct costs will include:
- Parking lot maintenance (snow removal and repair)
- Lobby maintenance
- Outdoor lighting
Sometimes, landlords will include more indirect costs in their common area maintenance charges, such as administrative, accounting, and legal fees. Other cam charges that tenants should be mindful of include:
- Capital Improvements (foundation, roof, etc.)
- Electrical Wiring
In all cases, it is essential to review how the lease defines CAM and how they are calcualted.
How is CAM calculated and charged?
There are many ways to calculate and charge CAM expenses. As a starting point, CAM expenses are usually based on a pro rata basis which represents a tenant’s square footage of the leased premises. The larger the leased spaced, the larger the tenant’s share in the expenses.
It is very important to know how the lease calculates this pro rata share. For instance, is the tenant’s square footage calculated by comparing the property’s total leasable area or just spaced currently occupied? The difference between each scenario can cost a tenant real money.
Often, the landlord will estimate the CAM charges for the year and the tenant pays this estimate each month as part of additional rent. At the end of the fiscal year, an audit will determine the actual CAM charges. Once calculated, the landlord will issue a refund if the CAM estimates were higher than the actuals or the tenant will pay an extra charge if the estimates were insufficient.
Alternatively, CAM charges can be baked into the first year’s rent. In the second year, the landlord will compare the total CAM charges over the previous year’s charges and then expense the tenant its pro rata share if there was an increase.
How to Negotiate and Reduce Cam Charges?
CAM charges should always be negotiated. If you are Tenant, seek to set a cap on how many expenses can increase each year. You might also want to negotiate the ability to amortize capital expenses the landlord incurs over the useful life of the improvement. For instance, passing the cost of a parking lot renovation in a single year could amount to a steep increase for the tenant. Tenant’s will typically want the right to audit the books to ensure that the landlord is accurately recording expenses.
Another common point of negotiation is over the management or administrative fee (usually a percentage) that the landlord tacks onto CAM charges. From the landlord’s perspective, this fee represents compensation for handling all additional maintenance. From the tenant’s view, the landlord is in the business of renting space and should not be inflating hard pass-through costs. Solutions to this issue would be to find a middle ground on the percentage or to look at other ways to cap expenses, such as fixing certain CAM costs or percentage increases throughout the term of the lease.