Common area maintenance
Common area maintenance (CAM) is a collection of operating costs that the landlord passes on the tenant. These should be carefully negotiated. For instance, you should ensure that your share of CAM equals your share of the building. If you have to pay property taxes, you should negotiate a right to either fight or have the landlord fight any property tax increases. And you can try to get a cap on the total amount of CAM. There are standard names in the commercial real estate industry for different sets of costs passed on to the tenant[1].
Common area maintenance charges are cost passed on to tenants in multi-tenant commercial buildings. They can include security, maintenance, snow removal, utilities, and other services necessary to keep the property in good shape. Typically, they are assessed on a proportional basis to the tenants. This is an income item, but it is offset against the corresponding items listed in the operating expenses for the property.
To get a basis for the monthly CAM charge collection, develop an estimated annual budget for the property. Then, on an annual or other basis, calculate and reconcile the actual expenses incurred for the items against the total of the estimates paid during that time period. Once that is done, you can collect a shortfall or refund any excess to the tenant[2].
Costs included in CAM
The lease will have a page or two describing in some detail what expenses are included as CAM costs. Generally, all of the expenses to maintain the shopping center, such as cleaning, sweeping, lighting, landscaping are included in CAM, and these items are pretty straightforward. But the tenant should be wary when an item that is vague and nonspecific, such as "repainting", is listed in CAM costs. It is important that all CAM items be defined as applying specifically to the common areas.
There are two factors that drive up the costs of CAM expenses:
- the pro-rata share the tenant pays
- the actual cost of the CAM expenses
Even if the actual cost of CAM expenses are decreasing, the tenant might be hit with stiff CAM increases if the occupancy of the shopping center is falling[3].
Items that affect the cost of a lease
Space costs are normally quoted in dollars per square foot. This dollar amount can be quoted in several ways, as shown in the following discussion on types of leases.
There are five major items that affect the cost of a lease[4]:
- space rent - the actual space to be leased
- common area maintenance fees - the prorata cost charged to your leased space for the maintenance of elevators, security, and other common areas
- property taxes - the prorata portion of state property taxes
- building insurance - your prorata share of the general building, fire and liability insurance. Not to be confused with your own liability and fire insurance, which you have to secure separately
- utilities - generally electricity and water
Advantages of Common area maintenance
- Common area maintenance (CAM) allows tenants and landlords to share the operating costs of a building. This encourages tenants to take care of the building and can help keep costs low.
- CAM can also provide a buffer for landlords when unexpected costs arise. If a tenant has agreed to pay for CAM, the landlord is not responsible for these costs.
- CAM also encourages tenants to take an active role in the upkeep and management of the building. This can help ensure that the building remains in good condition and can help tenants save money in the long run.
- CAM can also help ensure that tenants are held accountable for their actions. If a tenant is responsible for damage to the building, they will be held financially accountable for it, which can help protect the landlord.
- Finally, CAM can help landlords to budget more accurately. By knowing what costs they are likely to incur, they can plan their finances accordingly.
Limitations of Common area maintenance
- Common area maintenance costs can be hard to estimate accurately, as they can vary from year to year and from building to building.
- CAM costs can also be difficult to budget for properly as they are often unpredictable.
- It can be difficult for tenants to understand exactly what their CAM costs include.
- Negotiations over CAM costs can be complicated and time consuming.
- CAM costs can be subject to annual increases and it can be difficult for tenants to keep up with these changes.
- CAM costs can add a significant amount to the overall cost of leasing a property.
- Negotiating a reduction in CAM fees: Depending on the size of the business and the amount of space rented, it may be possible to negotiate a lower CAM fee. This could be accomplished through a lower rent rate, free or discounted services, or other incentives.
- Negotiating a fixed rate: A fixed rate of CAM fees allows the tenant to plan and budget for the costs of operating the space. This eliminates unexpected costs and makes it easier to anticipate future expenses.
- Developing a maintenance and repair plan: This plan should be incorporated into the lease agreement and should outline the expectations for both the tenant and landlord to ensure the building is properly maintained.
- Establishing a CAM fund: This fund can be used to pay for any unexpected repairs or maintenance tasks that may arise.
Overall, tenants should negotiate their CAM fees carefully to ensure that the fee is fair and does not add an unexpected expense to their budget. It is also important to establish a maintenance and repair plan, and consider setting up a CAM fund to cover any unexpected costs.
Footnotes
| Common area maintenance — recommended articles |
| Modified gross lease — Exempt supply — Port charge — Output tax — Committed cost — Normal cost — Insured value — Depreciation vs. amortization — Declared value |
References
- Fisher S.D., (2010), The Real Estate Investor's Handbook, Atlantic Publishing Company, Florida.
- Fleisher B., (2003), A Guide for Small Business Owners, iUniverse, New York.
- Kondo D., (2010), Business Basics in Hawaii: Secrets of Starting Your Own Small Business , University of Hawaii Press, Honolulu.
- Soodek C., (2011), Law for the Life Cycle of Your Business, Profit and Laws Press, Chicago.
Author: Kinga Krzyściak
