What Are CAM Expenses?

Common Area Maintenance expenses are fees charged to tenants by landlords to cover the costs associated with maintaining and operating the shared areas of a commercial property[1]. These common areas include spaces used by or benefiting all tenants, such as:

• Lobbies
• Elevators
• Hallways
• Parking lots
• Landscaped areas
• Public restrooms
• Building security systems

CAM expenses are typically part of a Triple Net (NNN) Lease, which includes three main components: common area maintenance, insurance, and property taxes[1]. The purpose of CAM charges is to distribute the costs of maintaining shared spaces fairly among all tenants, ensuring that the property remains attractive, functional, and safe for everyone.

Calculating CAM Expenses

The calculation of CAM expenses can vary depending on the specific terms outlined in the lease agreement. However, the most common method involves allocating costs proportionally based on each tenant's share of the total leasable area, known as the tenant's pro-rata share[2].

To calculate a tenant's pro-rata share:

1. Divide the square footage of the tenant's rented space by the total leasable square footage of the property.
2. Multiply this percentage by the total CAM expenses for the property.

For example:

A tenant rents 2,000 square feet in a 10,000-square-foot building. The total CAM expenses for the property are $50,000 per year.

Tenant's pro-rata share = (2,000 sq ft / 10,000 sq ft) x $50,000 = 0.2 x $50,000 = $10,000

In this scenario, the tenant would be responsible for $10,000 in CAM charges per year[2].

Types of CAM Expenses

CAM expenses can be categorized into two main types:

1. Fixed CAM charges: These are predetermined amounts agreed upon by both parties in the lease agreement. Fixed CAM charges provide more predictability for tenants but may not accurately reflect actual maintenance costs.
2. Variable CAM charges: These fluctuate based on the actual maintenance expenses incurred by the landlord. Variable CAM charges are more accurate but can lead to unexpected increases for tenants[2].

Common Inclusions in CAM Expenses

While the specific expenses included in CAM charges can vary depending on the lease agreement, some common examples include:

1. Property taxes and insurance premiums
2. Utilities for common areas (electricity, water, gas)
3. Janitorial services and supplies
4. Landscaping and grounds maintenance
5. Snow removal and pest control
6. Security services
7. Trash removal and recycling
8. HVAC maintenance and repairs
9. Elevator and escalator maintenance
10. Parking lot maintenance and lighting[2][3]

It's essential for both landlords and tenants to carefully review the lease agreement to understand which expenses are included in CAM charges and how they will be calculated.

CAM Expenses Across Different Property Types

The items included in CAM expenses can differ depending on whether the lease is for an office, retail, or industrial property. Here's a general overview of CAM expenses for each property type:

Office Properties

• Building maintenance and repairs
• Janitorial services
• Utilities for common areas
• Security services
• Elevator maintenance
• HVAC system maintenance
• Property management fees

Retail Properties

• Parking lot maintenance
• Common area lighting
• Marketing and advertising for the shopping center
• Security services
• Landscaping
• Snow removal
• Trash collection

Industrial Properties

• Maintenance of loading docks
• Parking lot upkeep
• Security services
• Landscaping
• Snow removal
• Common area utilities[1]

CAM Expense Caps and Exclusions

To protect tenants from unexpected increases in CAM charges, many lease agreements include provisions such as:

1. CAM Caps: These limit the annual increase in CAM expenses to a certain percentage, typically 3-5%[4].
2. Exclusions: Certain expenses may be explicitly excluded from CAM charges, such as:some text
   • Capital improvements
   • Repairs resulting from tenant negligence
   • Costs related to leasing or marketing the property
   • Executive salaries or overhead costs for the landlord's staff[3]

CAM Reconciliation Process

CAM expenses are typically estimated at the beginning of each year, and tenants pay their share in monthly installments. At the end of the year, a reconciliation process takes place:

1. The property manager provides a statement of actual CAM and Operating Costs for the previous year.
2. This statement shows whether tenants have underpaid or overpaid.
3. Tenants either receive a credit for overpayment or owe the balance for underpayment[1].

Importance of Understanding CAM Expenses

Comprehending CAM expenses is crucial for several reasons:

1. Budgeting: Accurate knowledge of CAM charges helps tenants budget effectively for their total occupancy costs.
2. Lease Negotiations: Understanding CAM expenses allows tenants to negotiate more favorable terms, such as caps on increases or exclusions of certain costs.
3. Avoiding Disputes: Clear understanding of CAM charges can prevent misunderstandings and potential legal disputes between landlords and tenants.
4. Financial Planning: For landlords, properly structured CAM charges ensure that the property remains profitable and well-maintained[1][4].

CAM Audits and Tenant Rights

Many commercial leases grant tenants the right to audit CAM charges. This process involves:

1. Reviewing detailed expense records provided by the landlord
2. Verifying that charges align with the lease terms
3. Identifying any discrepancies or overcharges
4. Negotiating adjustments if errors are found

Tenants should consider conducting regular CAM audits, especially for properties with significant common area expenses[4].

Impact of Lease Accounting Standards on CAM Charges

Recent changes in lease accounting standards (ASC 842 and IFRS 16) have affected how CAM charges are treated in financial reporting:

1. Variable CAM charges: These are excluded from the measurement of the lease liability and lease asset. They are recognized as an expense in the income statement when incurred.
2. Fixed CAM charges: Lessees can elect to either: a) Bundle fixed CAM with base rent and capitalize it, increasing the lease liability and right-of-use asset on the balance sheet. b) Segregate CAM from base payments and not capitalize the CAM component, which requires determining the relative standalone observable price of the base property and CAM[2].

Best Practices for Managing CAM Expenses

For landlords:

1. Maintain detailed records of all CAM-related expenses
2. Provide clear, itemized statements to tenants
3. Be transparent about calculation methods and any changes in expenses
4. Consider using property management software to track and allocate CAM expenses accurately

For tenants:

1. Carefully review lease terms related to CAM charges before signing
2. Request caps on annual CAM increases during lease negotiations
3. Regularly review CAM statements and conduct audits when necessary
4. Budget for potential CAM charge increases

Conclusion

Common Area Maintenance expenses are a complex but essential aspect of commercial real estate leases. By understanding the components of CAM charges, calculation methods, and potential variations across property types, both landlords and tenants can ensure fair and transparent cost allocation for shared spaces. Regular communication, clear documentation, and periodic audits can help maintain a positive landlord-tenant relationship while keeping properties well-maintained and financially viable.

As the commercial real estate landscape continues to evolve, staying informed about CAM expenses and related accounting standards will be crucial for all parties involved in commercial leases. By implementing best practices and maintaining open lines of communication, landlords and tenants can navigate the complexities of CAM charges effectively, creating mutually beneficial lease agreements that support the long-term success of commercial properties.

Citations: [1] https://aquilacommercial.com/learning-center/common-area-maintenance-cam-fees-definition-calculation/ [2] https://explore.leaseaccelerator.com/resources/blog/common-area-maintenance-cam-charges-explained/ [3] https://fastercapital.com/content/CAM-Charges--Navigating-Common-Area-Maintenance-Expenses.html [4] https://www.ioptimizerealty.com/blog/common-area-maintenance-cam-charges [5] https://blog.rebolease.com/cam-common-area-maintenance-an-overview/ [6] https://fnrpusa.com/blog/understanding-common-area-maintenance-fees/