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 Are CAM Charges?
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 costs of maintaining or repairing common areas shared by tenants include:
- 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
Additionally, capital expenditures like repaving a parking lot or replacing an HVAC unit may also be included in CAM.
How to Calculate CAM
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.
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 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. Utility bill estimates can be obtained easily 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.
Other types of services like landscaping, snow removal, and trash removal are trickier to estimate. However, you can try calling some of those businesses in your area and asking them what the typical monthly expense is for your type of commercial property. Once you have all the numbers, you should raise the numbers a bit in order to account for unseen building costs, as well as to account for any repairs or maintenance needed.
Now that you have this information, you can estimate CAM charges 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.
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.
For example, in a fee-simple, single-net, double-net, or triple-net lease, the tenant will be responsible for paying at least a portion of the CAM costs. Single-net leases require the landlord to pay maintenance costs and insurance, while the tenant pays a prorated share of property taxes.
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.
As an absolute triple-net lease property owner, it’s simple to calculate CAM – the tenant pays for 100% of those charges as defined in the lease. As the landlord, you are repsonsible for nothing. High-credit tenants such as Walgreens, Dollar General, and McDonald’s pay for all their own maintenance and expenses.
To Wrap it Up – CAM Charges & NNN Lease Investments
As you consider investing in commercial property, be sure to investigate the asset classes, tenant type(s), and lease types. Also, take a deep-dive into CAM, OpEx, and CapEx before you purchase – this will save you time, money, and legal hassles later.
Already own a high-maintenance rental property that requires hands-on management and CAM reconciliation every year? It may be time to trade up to a NNN property using the IRS’s tax-deferral benefit – the1031 exchange – with which you can sell and defer capital gains tax on 100% of the profits.
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 consultation, 314-997-5227.