When it comes to buying a multi-tenant property, it is clear no two commercial leases are ever the same. As the owner of the property, you need to be aware of all the possible operating expenses, especially the Common Area Maintenance (CAM), so it won’t negatively affect your Net Operating Income (NOI).
So, let’s zone in on the CAM portion of the lease and what you should prepare for ahead of time as a Landlord when it comes to signing that next tenant.
First off, CAM charges are negotiated between the Landlord and the Tenant during the lease negotiation process and can vary between leases based upon tenant type (local vs. national) and property type (office vs. retail shopping center). As a Landlord, it is very important to understand the CAM language in your tenants’ leases as it will impact your collections for the charges.
The more broadly the charges are defined, the greater the chance of coverage for the majority of the operating expenses. More sophisticated tenants will spend more time negotiating the CAM charges language in an attempt to more clearly define exactly what will be included.
Before we get into the specifics of CAM items, it is important to understand the difference between a full service lease, gross lease, and standard retail lease types. Full Service leases include CAM, taxes, insurance, utilities, janitorial, and management all wrapped up in the base rental rate. A Gross Lease, or a Modified Lease, typically includes “base year” CAM, taxes, and insurance and is subject to periodic adjustments, depending on actual spend.
There are several retail lease types including:
- Absolute Net lease: Tenant is fully responsible for all building expenses, including the roof and structure
- Single Net lease (N): Landlord covers all building expenses and Tenant pays a pro rata share of the property tax, utilities, and janitorial
- Double Net lease (NN): Taxes and insurance premiums are paid by Tenant while the Landlord maintains all the exterior and common areas
- Triple Net lease (NNN): Likely the industry catch phrase you’ll hear most. The Landlord maintains all common areas, carries insurance, and remits taxes directly to the county. All of these costs are considered reimbursable and billed to the tenants as monthly impounds. (See Reconciliations below)
- Learn more about these types of leases
Moreover, a lease could offer fixed CAM, where Landlords set a flat fee for tenants with small annual increases to account for inflation. This route has become more and more common in commercial real estate leases as it simplifies the whole CAM discussion for all parties involved.
Finally, be sure to understand how to calculate the “load factor” when dealing with office space and how it plays into determining the CAM charges for each tenant. Simply divide the Usable Square Feet (USF), or the tenant’s individual occupied space, by the Rentable Square Feet (RSF), or the USF plus part of the common area space (i.e. shared restrooms, lobby, and hallways).
Rentable Square Feet
___________________ = Load Factor
Usable Square Feet
- Parking lot maintenance (i.e. resurfacing, striping, etc.)
- Cleaning services (i.e. hallways, restrooms, and elevators)
- Landscaping/portering (debris/trash management)
- Property taxes
- Utilities (i.e. electricity, gas, etc.)
- Non-recurring items (i.e. cost of clean-up due to an extreme weather event)
- Snow removal (if applicable)
- Administrative fees (typically based upon a certain percentage of total CAM charges)
- Management fees (typically based upon a certain percentage of total collections)
Caps on CAM refers to when there is a limited amount that it can increase per year, and it is typically stated as a maximum percentage increase over the amount for the previous year. This may be calculated year-over-base (initial base CAM charge) or year-over-year, and the increase can be compounded or non-cumulative.
In the event that CAM charges are lower than the cap, floors can be utilized to budget in a minimum increase in the charges with the expectation that it will lessen a more major increase in the future. This is especially useful when there is some assumption of inflation in CAM charges over time, even if there is no inflation in a given year.
Also known as recoveries, billbacks, true-ups, or pre-bills, this action refers to the annual readjustment of the actual CAM charges for a fiscal year vs. monthly charges billed to Tenant. Note: The monthly CAM charges that tenants pay as part of their rent is only an estimate of their monthly, pro rata share of the CAM charges for the current fiscal year. These estimates are calculated using the property's budget prepared by the Property Manager.
At the end of each year, the actual CAM expenses are reconciled against what the Tenant paid in. Any deficit shall be paid to the Landlord, and any surpluses are credited back to the Tenant.
As stated, there is no standard lease for commercial tenants and the CAM language should be carefully calculated and negotiated before executing that lease at your property. The better you familiarize yourself with the terms outlined above, the better equipped you’ll be to protect against unaccounted for operating expenses that will eat away at your overall NOI you had projected.
AMBER KING >
Director of Property Management
Amber King joined SimonCRE in 2021 as the Director of Property Management, where she is responsible for the day-to-day operations and property management functions of SimonCRE's growing portfolio across the US. She brings 15 years of commercial real estate expertise with a focus in shopping center management. Her team oversees annual budgets, reconciliations, tenant communication, and assisting in the acquisitions and dispositions of locations, among other duties.