When you buy a commercial real estate property that is leased to one or more tenants, including a triple net (NNN) lease property, CAM, or “common area maintenance” charges need to be clearly defined in the lease and paid for by either the landlord or the tenants. CAM reconciliation is an accounting of those charges that may be performed at the end of the year to “reconcile” actual charges.
What is CAM (Common Area Maintenance)?
First, let’s define CAM, or “common area maintenance,” charges in more detail. 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.
Other CAM charges for Commercial Real Estate
- Sewer, plumbing, electrical
- 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
- Reserve funds
CAM can also include capital expenditures like repaving a parking lot or replacing an HVAC unit, as well as system depreciation.
Download our CAM Checklist here so you know what to ask and look for as you view properties.
Common Ways to Determine CAM Fees
Based on a tenant’s proportionate share of a building, CAM charges are a percentage calculated by dividing the square footage occupied by the tenant, by the total square footage of the building. The resulting number is called the lessee’s pro-rata share, and it is specified in the lease agreement.
If it’s an existing property with CAM charge records …
One way of determining CAM charges is to take a look at the last 3–5 years of CAM expenses and choose the highest number. That way, tenants can budget the additional expense and you’ll have an easier time collecting it. If the actual amount ends up being less than anticipated, it’s easy enough to either give a credit or a refund for the difference.
If new property without previous CAM examples …
If for some reason there is no data available for previous years (for example, if you’ve recently purchased a new CRE property), then determining CAM will take a bit of effort on your part.
- Contact utility companies. Utility bill estimates can be obtained by contacting the relevant utility companies and by asking for bills for the previous years. Many utility companies will, in fact, have a yearly summary of utility usage divided up by month for easy comparison.
- Have contractors, such as those for security systems, landscaping, snow removal, trash removal, window washing, HVAC maintenance, etc. come out to give you estimates on their services for your property.
Once you have all the estimates, raise the numbers a bit in order to account for unseen costs, as well as to account for any repairs or maintenance needed.
Keep in mind, if there are large fluctuations in the pre-determined estimated base charges compared to actual charges, this can be costly. When there is a fiscal-year CAM loss, chances are, the estimated charges are locked into a multi-year lease without the ability to be changed to reflect the higher costs. The inconvenience and cost to you, the property owner, of reconciling year-end actual CAM expenses versus the monthly charges billed to the tenant can be significant.
Estimate CAM Fees
Now that you have this information, you can estimate CAM fees for the year and then divided the total into monthly payments. At the end of the year, the actual CAM costs are added up; if the total is more than what was paid, the difference is returned, or in the case of a negative difference, paid by the tenant. This is done through CAM reconciliation.
Controllable CAM Expenses
Controllable CAM expenses, or fixed costs, do not vary based on occupancy or usage. These could be things like ground maintenance, snow removal, administration salaries, and security. These are allocated to the entire premises, regardless of vacancies or lease exclusions.
Uncontrollable CAM Expenses
Uncontrollable, or variable CAM expenses, do vary with occupancy, usage, and operations. These CAM costs would include things like water usage, electricity, gas, HVAC system maintenance, and building maintenance.
CAM reconciliation refers to an accounting of the charges at the end of the year. Typically, most tenants won’t request a reconciliation, in which case any extra is passed on to you as owner.
CAM Costs Depend on the Type of Lease
Not all landlords are required to pay CAM costs. Depending on the type of lease, tenants may pay all or a portion of the total amount or in some cases, none at all. In a fee-simple, single-net, double net, gross lease, or triple net lease, the tenant is responsible for paying at least a portion of the CAM costs. For example, single-net leases require the landlord to pay maintenance costs and insurance, while the tenant pays a prorated share of property taxes.
Let’s look at CAM for these lease types in more detail.
Double Net Lease CAM Fees
Double-net leases require the landlord to pay only some maintenance costs, like roof/structure/parking lot, while the tenant pays pro-rated property, insurance, and CAM. The NN leases with minimal landlord costs can sometimes be referred to as modified triple nets or non-absolute NNNs.
Types of Double Net Lease Properties or Triple Nets with Minimal CAM
- Fast-food restaurants
- Child care assets and early learning centers
- Medical facilities
- Car washes
- Office complexes
Gross Lease CAM Fees
In a gross lease, also called a full-service lease, the tenant pays a lump sum that is all-inclusive. This includes charges for things such as janitorial services, electricity, insurance, property taxes, and parking lot services. The tenant pays a higher amount per square foot, but it allows him or her to estimate costs. The landlord may also save money since it is easier and cheaper to assess and analyze the tenant’s CAM expenses.
This setup is also flexible. For example, as a landlord, you can also choose to exclude costs such as janitorial services and some utilities. You can also charge tenants more for overuse of common areas. This would then be termed a modified gross lease.
Types of Gross Lease Properties with Complex CAM
- Multi-tenant buildings
- Industrial warehouse facilities
- Office complexes
- Apartment complexes
- Retail centers
Absolute NNN CAM Charges
By contrast, when you own an absolute triple net lease property, there are NO CAM charges. The tenant pays all expenses, including taxes and insurance. As a landlord, you pay nothing and hold zero responsibility for any part of maintaining the property.
Types of Absolute Triple Net Lease Properties with No CAM
- Fast-food restaurants
- Dollar stores
- Medical facilities
- Drug stores
- Gas stations/convenience stores
- Auto parts stores
- Child care assets/early learning centers
- Car washes
- Some industrial
As an absolute triple net lease property owner, it’s simple to calculate CAM fees – the tenant pays for 100% of those charges as defined in the lease. High-credit tenants such as Walgreens, Dollar General, and McDonald’s pay for all their own maintenance and expenses.
Why You Need a CAM Section in Your Commercial Lease Agreement
Adding a CAM section into your commercial lease agreement provides you, the landlord, protection from rising and unpredictable costs, which protects your return on investment. It also allows for flexibility in your budget if repairs need to be made or maintenance issues crop up. Repairs become less of an issue if there are sensible CAM fees built into your lease.
If you purchase a double net or triple net lease property tenanted by an investment-grade corporation, such as Dollar General, 7-Eleven, or Starbucks, the CAM fees you’re responsible for will not be negotiable, though they are typically minimal, such as roof/structure/parking lot, or in some cases, none at all (absolute NNN).
To Wrap it Up – Reconciling CAM Charges Can be Complex – Turn to NNN Investments Instead
New investor? As you consider investing in commercial property, be sure to investigate the different asset classes, tenant type(s), and lease types (gross lease, double net lease, triple net lease).
Also, take a deep dive into CAM, OpEx (expenses incurred in the operation of the building), and CapEx (capital expenses that improve the functionality of the property, extend the life of the asset, or alter its use) before you purchase. This will save you time, money, and legal hassles later. If you want a no-hassle, no-expense property investment, then we recommend purchasing an absolute NNN lease property.
Already own a high-maintenance rental property that requires hands-on management and complex CAM reconciliation every year? You may be leaving money on the table. To enjoy an easier lifestyle and potentially higher ROI, you could trade up to a NNN property using the IRS’s tax-deferral benefit – the 1031 exchange – with which you can sell your gross lease property, buy a NNN, and defer federal capital gains tax on 100% of the profits.
Ready to receive a 100% responsibility-free monthly check for the next two decades from a multibillion-dollar, reliable, credit-worthy tenant anywhere in the nation with periodic rent increases, no maintenance responsibilities, and a solid 7–10% overall ROI? Then a NNN investment is for you.
If you would like to learn how you can 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 conversation, 314-997-5227.