When you buy a commercial real estate property that is leased to one or more tenants, either the landlord or tenants need to pay the Common Area Maintenance (CAM) charges. CAM reconciliation is an accounting of CAM charges that may be performed at the end of the year to “reconcile” actual charges. Depending on the ownership structure of your property’s lease, including a triple net (NNN) lease properties, CAM charges must be clearly defined in the lease and paid for by either the landlord or the tenants.
What are Common Area Maintenance (CAM) charges?
CAM charges are operating costs for maintenance work fees and upkeep on the common areas of the property, such as parking lots, outdoor lighting, and landscaping. These charges are separate from the cost of rent.
CAM charges for Commercial Real Estate can apply to:
- Sewer, plumbing, electrical maintenance
- Snow removal
- Trash removal
- Janitorial and pest control services
- Security
- Insurance, including liability insurance
- Real estate taxes
- Center signage
- Common area utilities
- Common area HVAC maintenance and HVAC replacement
- Landlord’s administrative or property manager costs
- Reserve funds
- Capital expenditures like repaving a parking lot
- System depreciation.
Stay informed! As you view properties, download our helpful, CAM Checklist here.
Common Ways to Determine CAM Fees
CAM charges are based on a tenant’s proportionate share of a building. They 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 you’re purchasing an existing property with CAM charge records, you can forecast the CAM charges that could face a property in a given year by looking at the last 3–5 years of CAM expenses and choosing the highest amount. That way, your tenants can budget the additional expense and you’ll have an easier time collecting those funds. If the actual amount ends up being less than anticipated, you can provide your tenants with a credit or a refund for the difference.
If you purchase a new property without previous CAM, then determining CAM will take a bit of effort on your part. We recommend you:
- Contact utility companies to source bill estimates for prior years. Many utility companies will, in fact, have a yearly summary of utility usage divided monthly for easy comparison.
- Request estimates from key contractors (e.g. security systems, landscaping, snow removal, trash removal, window washing, HVAC maintenance, etc.). Invite them onsite so they can provide you with an estimate on their services for your property.
Once you have collected the estimates, raise the numbers a bit in order to account for unseen costs due to inflation or unforeseen repairs or maintenance.
Keep in mind, a big gap between your predetermined estimate compared to actual charges could be costly. When there is a fiscal-year CAM loss, chances are that 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 billing those same monthly charges to the tenant can be significant.
What is CAM Reconciliation?
In order to estimate CAM fees for the year and then divide the total into monthly payments, add up the actual CAM costs at year-end. At the end of the year, the actual CAM costs are added up. If the total cost is less than what the tenants paid, you should return the difference. If the total fees are more than what the tenants paid (ie. a negative difference) the tenant must pay additionally and you, as landlord, must collect these additional payments. This process is called CAM reconciliation.
Controllable CAM Expenses
Controllable CAM expenses, or fixed costs, do not vary based on occupancy or usage. These include things like ground maintenance, snow removal, administration salaries, and security. As owner of a traditional multi-unit residential property you would need to address this common area maintenance for 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 could include things like water usage, electricity, gas, HVAC system maintenance, and building maintenance.
CAM Costs Depend on the Type of Lease
CAM charges and CAM reconciliation can quickly become time-consuming and expensive. But did you know that 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.
Double Net Lease CAM Fees
Double-net (NN) leases require the landlord to pay only some maintenance costs, like roof, structure, and parking lot maintenance, while the tenant pays prorated 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
- QSRs
- Child care assets
- Early learning centers
- Medical facilities
- Car washes
- Industrial
- 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, which allows the tenant 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 Gross Lease setup is flexible. For example, as a landlord, you can 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, you pay and administer no CAM charges. Your tenant pays all CAM charges, including taxes and insurance. As a landlord, you pay nothing and hold zero responsibility for any part of the property maintenance.
Types of Absolute Triple Net Lease Properties with No CAM
- Fast-food restaurants
- QSRs
- Dollar stores
- Medical facilities
- Drug stores
- Gas stations
- Convenience stores
- Auto parts stores
- Child care assets
- Early learning centers
- Car washes
- Some industrial properties.
As an absolute triple net lease property owner, your tenant pays for 100% of any CAM fees 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 in turn protects your return on investment (ROI). 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 and could include parking lot, landscaping, trash removal etc or in some cases, none at all (in the case of absolute NNN leases).
Save Yourself the Hassle of CAM Charges and Reconciliation – Turn to NNN Investments Instead
Are you a 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) to determine which is a best fit for you and your financial goals 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 and/or extend the life of the asset, or alter its use) before you purchase to save yourself time, money, and legal hassles later.
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.
Free, No-obligation, No-pressure NNN Conversation with an Advisor
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 overall ROI? Then a NNN investment is for you.
If you want a no-hassle, no-expense property investment, then the expert advisors at Westwood Net Lease Advisors recommend you purchase an absolute NNN lease property.
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 today. 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.
