Commercial real estate investment can be a surprisingly communal experience, but perhaps no more than when common area maintenance is involved. Common area maintenance (often simply abbreviated as CAM) impacts both tenants and landlords alike. It can dramatically affect a property’s profitability, just as it can influence a tenant’s costs. Yet, it’s often buried in lease agreements. Here’s why you should be paying attention to CAM, no matter what side of the lease you’re standing on.
What Constitutes Common Area Maintenance in a Commercial Property?
When tenants lease portions of a commercial property, they’re typically focused on their specific units. But what about the shared areas and services of a property? Common area maintenance compensates for these shared areas, often by dividing their accrued expenses among the tenants.
Examples of common areas in commercial properties include:
- Corridor lighting
- HVAC systems (shared)
- Landscaping
- Parking lot operation
- Property management costs
- Security
Divvying Up Common Area Maintenance
How are common area maintenance costs typically divided amongst tenants? It differs from lease to lease, but typically it’s directly proportional to a tenant’s leased space. Say a 100,000 square foot shopping center is divided equally amongst 10 tenants. In this scenario, each tenant would likely be responsible for 10% of the common area maintenance costs.
However, calculations can get a bit more complicated when we introduce variable CAM structures. CAM properties are split into:
- Fixed CAM – Involves a static amount, commonly paid on a monthly basis, that rises annually.
- Variable CAM – Factors the actual usage of a tenant, sometimes with year-end reconciliation.
Lease types can also complicate the way common area maintenance responsibilities are divided. For example, a triple net lease (NNN) requires tenants to pay a fixed base rent plus property tax, insurance, and CAM. Meanwhile, a Gross Lease lumps CAM into the base rent (along with any additional operating expenses). Diligently reviewing your lease is especially important when it comes to NNNs, since CAM can be handled in different ways (such as capped or controlled). Landlords and tenants alike will want to ensure they’re on the same page so the relationship continues to satisfy all parties.
Why Tenants and Landlords Need to Diligently Review CAM
Tenants who don’t carefully review their leases may regard common area maintenance as a hidden fee. This can be further compounded if CAM costs suddenly surge because of upgrades, unexpected repairs, or even tenants moving out. Often, tenants who are well-versed in CAM will negotiate caps to their CAM costs before signing a lease. Additionally, tenants can bargain for audit rights. But at the very least, a commercial tenant should ensure that a landlord clearly defines what’s included in common area maintenance charges.
Landlords can establish trust early in a relationship with a tenant by being upfront and transparent about CAM. This can spare them the headache of disputes further down the road. It’s also important that landlords cover themselves where CAM is concerned by keeping clear and detailed records in case of potential challenges from tenants.
Clear CAM Serves Long-Lasting Business Relationships
Maintaining a firm grasp on common area maintenance costs is crucial to getting the most from a commercial lease, regardless of whether you’re a landlord or a tenant. Therefore, it’s important to ensure that CAM is well-structured and transparent when presented in the lease. By being clear and direct about CAM, you reduce the chances of disputes and provide yet another step in establishing a robust working relationship that can be reliably lucrative to both parties for years.
