When leasing commercial space, there are several types of leases. From Gross Leases to Net Leases to Percentage Leases, each lease takes a different shape. On top of that, the specific terms of the commercial lease depend on the landlord. Gross leases typically cover all expenses (with exceptions) and tend to be higher. Percentage leases are typically used by retail landlords and require tenants to pay a percentage of their profits to the landlord. And common area maintenance only makes up one portion of commercial leases.
However, office, medical office, industrial, and many other commercial properties commonly come with Net Leases. With this type of lease, tenants pay a set monthly rent along with usual costs to cover building routine operations, maintenance, and use of the property.
These usual costs generally include real estate taxes, property insurance, and common area maintenance items.
What is CAM?
Common area maintenance, often shortened to CAM, is a major component of any commercial lease. Some landlords may refer to CAM fees as Load Factor fees. In a Triple Net Lease (NNN), CAM fees make up one-third of this triplet (along with taxes and insurance). While the latter two factors tend to be fairly standard and predictable, CAM charges might vary from month to month and from season to season.
Basically, in an NNN lease, the owner passes maintenance costs of common areas on to tenants (also referred to as “pass-through” costs). As a result, you, the leaseholder, pay for certain expenses. Typical CAM charges include things like janitorial services, minor building repairs, landscaping, snow removal, and other maintenance-related expenses on a pro rata (prorated) basis.
For example, if there are 10 tenants leasing space in a commercial property, all 10 tenants pay a portion of the total landscaping cost. In many cases, landlords determine the CAM portion each tenant pays based on the square footage of the space that each occupies.
Depending on the lease terms, tenants may pay either fixed or variable CAM fees. On top of that, tenants may pay CAM fees at different intervals – monthly, quarterly, or even annually.
7 Common Area Maintenance Items to Consider When Negotiating a Commercial Office Lease
Before leasing a commercial space, you should be aware of typical CAM charges costs which you might incur. In this article, we look at 7 common area maintenance items to consider when negotiating a commercial office lease.
- Capital Improvements – From time to time, every property needs updates. Sometimes these may be cosmetic improvements. At other times, landlords may undertake major projects involving substantial improvements to a property to improve its value or extend its life. If the landlord includes this expense in CAM, then you may be expected to pay your portion of any capital improvement projects. However, some tenants will argue that they shouldn’t need to pay for projects that won’t directly benefit them. Examples of capital improvements might be a new HVAC system, a roof upgrade, or accessibility improvements. In the end, it is very important to get as much clarity as possible from the landlord about capital improvements. After all, you shouldn’t have to fund a property owner’s desire to renovate a property.
- Janitorial Services – Commercial tenants expect that common areas of properties will be cleaned regularly. On the whole, commercial property owners either have their own janitorial staff of contract with a janitorial company. As such, each tenant also must pay a portion of the janitorial contract fees. This fee may also include the cost of janitorial supplies.
- Security Services – Since having a secure facility is crucial to safeguarding businesses and their equipment, security services are a part of CAM. Alarms systems, on-site security personnel, overnight security, along with fire and smoke detection systems are all a part of property security. Since the tenants of a commercial property share these services, they usually also share the expense.
- Systems – Use of lighting, plumbing, electrical wiring, HVAC, and other systems within common areas like lobbies, restrooms, and elevators are shared by all tenants. Thus, these costs are also shared by tenants. When reviewing your lease, ask what your share of these costs will be.
- Management Fees – Managing commercial properties requires a great deal of time and effort. So instead of managing commercial properties themselves, many landlords contract with Property Management companies. These companies handle a wide range of services which may include leasing, building operations, tenant communications, build-out management, facility maintenance, stakeholder reporting, financial services, and other services that directly impact tenants. If your landlord uses a property management service, you and the tenants will probably share the cost.
- Parking Areas – Regardless of the commercial building, tenants usually share the costs for parking areas. The property might only have a surface parking lot, or it could have a parking deck. Either way, the costs associated with parking lot and parking garage maintenance, repaving projects, and parking staff are usually included in CAM fees.
- Administrative & Maintenance Fees – Although many landlords may outline the CAM fees in detail, some may only list Administrative Fees or Maintenance Fees. If the lease doesn’t clearly spell out the specific charges, ask the landlord to elaborate. Your CAM fees could be paying for things like permits, any legal costs, advertising, signage, or general expenses. You should not be paying for expenses like the owner’s income tax filing fees, costs associated with rent collection, or other services that benefit the owner(s).
How to Calculate CAM Charges
This ‘back-of-the-napkin’ calculation might not be totally accurate. However, it does give you a general idea of your estimated CAM responsibility for a given property.
Calculating CAM charges is fairly straightforward. Below are 3 easy steps for figuring out CAM.
- First, find out the property’s gross leasable area (GLA). Usually, you can get this information from the leasing agent. The GLA is the total square footage of rentable space in the property.
- Next, find the total square footage that you want to lease. You can ask the leasing agent or find this information online or in other marketing materials.
- Lastly, divide the square footage of the space you want to lease by the GLA. The resulting figure will be the percentage of your portion of the total CAM fees. So if you want to lease 1000 SF in a 10,000 SF building, your share of the CAM is 10% – 1,000/10,000 = 0.1 (10%).
The Variable Cost of Common Area Maintenance
Depending on what type of property you choose and the type of lease, CAM costs will vary. If you lease a space in an office building, you will share numerous costs with your fellow tenants. On the other hand, certain retail centers and office parks don’t share amenities like lobbies or elevators. Yet they do share parking, sidewalks, landscaping, and other things.
In summary, be sure you find out exactly what the CAM fees do and don’t include. Also, don’t agree to a contract before you know what you will be paying. Once you’ve signed your lease, it is legal and binding. So before signing a commercial lease, make sure that you have an expert review the contract. At CXRE, we can help you to navigate a commercial lease. Our expert staff have decades of experience and are ready to assist you. Contact us today!