When you buy commercial real estate for rent, including a triple-net (NNN) lease property, CAM, or “Common Area Maintenance” charges are clearly defined and paid for by either the landlord or the tenant as outlined in the terms of the lease.
CAM variables depend on the property type (retail, office, industrial, etc.), tenant, type of lease (double- or triple-net), and more. Keep reading for a simple breakdown of the different classifications of CAM charges and what’s included in the monthly figure to the tenant or landlord.
What Are CAM Charges?
CAM charges are operating costs charged in addition to the base rent for exactly what the title implies – maintenance fees for work performed and upkeep on the common areas of a property, such as parking lots, outdoor lighting, and landscaping.
Ongoing operational costs for running the business fall into two areas: controllable and uncontrollable. Examples of uncontrollable CAM charges include monthly utilities and snow removal. All other CAM charges, such as taxes and insurance, are considered controllable.
Since the tenant benefits from the upkeep of common areas and building maintenance, in most cases he or she is expected to pay a prorated, or “pro rata,” share of those operating expenses (opex). Examples include:
- Sewer, plumbing, electrical
- Parking lot striping, repair, refurbishment, lighting
- Snow removal
- Trash removal
- Janitorial and pest control services
- Liability insurance
- Real estate taxes
- Center signage
- Common area utilities
- Common area HVAC maintenance
- Landlord’s administrative/property manager costs
Keep in mind, CAM is different than capital expenditures (capex). Both CAM and capex will be outlined in the lease, and with an absolute NNN investment, both are always the tenant’s responsibility.
How CAM is Calculated
As a triple-net lease property owner, it’s simple to calculate CAM – the tenant pays for 100% of those charges as defined in the lease. Most often, NNN tenants are national franchises such as Walgreens, Dollar General, or McDonald’s who want control of all aspects of the property for brand uniformity. They do their own maintenance, use their own vendors, order their own signage, and pay for all opex and capex.
As a NNN investor, you do nothing but collect rent checks while the tenant takes care of everything, including the net real estate taxes, net building insurance, and net common area maintenance. If you own a double-net lease, it’s a different story.
Decoding CAM Charges for Non-Triple-Net Leases
If you happen to own rental property that is not a triple-net lease investment, then CAM costs can be complicated and full of responsibility for you, the property owner.
- There are many variations on the definition of CAM; decoding them and not missing any costs in the lease can be tough.
- Often, there are large fluctuations in the pre-determined estimated base charges compared to actual costs/charges.
- The inconvenience and cost to you, the property owner, of reporting and reconciling year-end actual CAM expenses versus the monthly charges billed to the tenant.
- When there is a fiscal-year CAM loss, chances are the pre-determined CAM charges are locked into a multi-year lease without the ability to be changed to reflect the higher costs.
That’s why at Westwood Net Lease Advisors, we primarily work with triple-net lease investments. With decades of experience in the commercial real estate industry, we see few benefits of any other type of rental investment.
Benefits of a NNN Lease Investment
Whether you are new to net-lease real estate or a seasoned investor, besides not having to deal with CAM, a triple-net lease property is a wise consideration with the following advantages:
- Credit-worthy, long-term tenant; usually a national corporation or large QSR franchisee.
- 10-20 years of passive, stable income.
- No maintenance, operations, or management concerns or costs.
- No capital expenditures
- Often a strong corporate-backed lease guarantee.
- If sold, you can benefit from using the capital in a §1031 tax-deferred exchange.
To Wrap It Up – How to Eliminate CAM Charges
As you enter the commercial real estate investment arena, consider all the pros and cons. And be sure to define CAM, opex, and capex before you purchase. This saves time, money, and legal hassles later. If you already own commercial rental property that requires hands-on management, it may be time to trade up to a NNN property tax-free using the IRS benefit of a §1031 tax-deferred exchange.
If you’re curious about how to become a NNN lease investor and leave the complications and costs of CAM behind, contact a Westwood Net Lease Advisor. Our expert advisors offer objective advice, education, knowledge, and advocacy – all without any cost to you! Contact us today for a no-obligation consultation, 314-997-5227.