(re-posted from our other Blog site)
Ever called on a “For Lease” sign and got told that rent is $ xxxx.xx per month + CAM? What are they talking about? Why isn’t it like when I rented an apartment, rent is rent and if I pay that amount I get to live there? What should be included in the CAM charges that I pay?
CAM is an acronym for “Common Area Maintenance” and it’s uses are often different in the various areas of the country. For the most part, and in it’s simplest form, CAM is an estimated annual amount of the total expenses for operating a property. When a Landlord discusses or quotes a CAM charge during the lease negotiations, they are usually expressing that charge as an estimate of the per square foot expenses that they intend to pass through to the tenant.
Now as with many items in a lease, the expenses that are included in calculating the CAM charges are determined by the actual verbiage in the lease. For the purpose of this discussion we will be discussing the most common meaning of CAM for the retail trade in the Branson, Missouri market, however there are no absolute rules. Landlords may include additional items and may exclude some that we will be including in this discussion. To fully understand the items included in CAM, read your lease.
CAM charges in general are all the expenses that are common to all tenants in a given property. For instance, a small neighborhood shopping center will have several custodial or maintenance jobs that must be done regularly. Some of those regularly completed jobs are: Grass and weed control, Parking lot sweeping, sidewalk cleaning and trash receptacle emptying. Other expenses that are often experienced are the common electric usage for the parking lot lights and the lighted signs or flagpoles, the large trash dumpsters need to be rented and emptied on a regular basis, often the water is supplied for irrigation as well as consumption in the stores. Virtually any “operating expense” will be added to the CAM charges. In most cases the costs of the management company fees or the employees of the property owner’s expenses are added to the CAM charges. And very often the real estate taxes and the insurance for the center are added to the CAM charges (although there is usually a separate clause in the lease denoting these expenses).
Calculations of the estimated CAM charges are relatively easy and fairly accurate, once the center has experienced a year or two of expenses. If the center is newer, the estimates will be a little bit more difficult, however if represented by a broker or if the landlord is experiences in the area, the estimate will most likely be very close to actual.
CAM is estimated by setting a budget into place that will attempt to list all probable expenses for the calendar year. The total for all those estimated expenses is than divided by the total rentable square footage in the property. The answer to that calculation is the estimated CAM charge per square foot. Simply multiply that by the total number of square feet in the space leased and that answer is the annual CAM estimate for the space you are leasing. Since that amount is relatively large and for many other legal reasons, the annual estimate is divided by 12 for a monthly charge. It is important to note that this is only an estimate. Usually there is language in the lease regarding how this CAM will be reconciled at the end of each year. Most leases will have some rules regarding overages and shortages. The most typical answer is that either the landlord will send the tenant an invoice for the shortages or a credit (or check) for the overage charges depending upon the outcome of the reconciliation.
Now the question of “why does the tenant have to pay these charges, after all it’s the landlord’s building?” is often asked by tenants, especially first time tenants. The answer is many fold. Probably the simplest answer is that the tenant is the entity receiving the use of the building and they are therefore the reason for the expenses. Probably a more understandable explanation is that a landlord expects to receive a certain amount of money for the space they are letting to the tenant. To ensure the landlord receives that amount of money, it has several way in which it can collect it’s rent. One simple way is what is referred to as a gross lease rental income. This lease arrangement is much like the apartment rental you may have experienced. Tenant pays a set rent and landlord pays all those CAM expenses. The problem with that is both the Landlord and the Tenant have a good chance of loosing. If the Landlord were willing to rent based on the Gross lease rental basis, he would naturally need to add the expenses to his rental rate and since the expenses are not accrued as of yet he will need to estimate them on the high side. Thus, the rent for a gross lease will be higher per month than the net lease.
A net lease arrangement is one in which the tenant does pay their portion of the expenses (CAM) with a few limitations and those limitations should be spelled out in the lease document. Now the Landlord and tenant set the rent and the landlord bills the tenant for the actual expenses on an estimated basis throughout the year with reconciliation at the end of the year. This is a much more equitable method of leasing for all parties. The Landlord knows its tenants will not be wasteful and leave water running, or lazy and throw trash out onto the parking lot because the increase in expenses or repairs will be the tenants expense. The tenant should feel confident that the center will not quickly be run down and dirty because the landlord is being reimbursed for the expenses.
While anything is possible when negotiating a lease- it is virtually impossible for a Landlord to modify it’s CAM calculation and charging methods once other tenants are in the building. The other tenants have a reasonable expectation that all tenants will be paying their fair share. If any negotiations were to reduce the CAM for a new tenant, the landlord would have to make up those deficits.
Some other acronyms that may be seen or some variations are:
CAMTI- Common Area Maintenance, Taxes, Insurance – This is used when the 3 clauses are lumped together.
NNN or Triple Net - The actual definition for this would be much to long, and local custom will often allow for many variations, but in it’s simplest form the description would be: Tenant pays for all expenses. Sometimes there is an exception for the replacement of the structure and roof.
Absolute NNN- mean the tenant pays for the roof and structure also – most often seen in single tenant buildings specially built for the tenant. – ie. a Walgreen’s stand alone building.
Our experience has shown that a property that has tenant’s paying their fair share of the expenses by way of a CAM charge will usually be better maintained and more professionally managed shopping center or Office Building.
