Some leases calculate CAM charges by dividing the CAM costs by the square footage of occupied space. Let's say that the same building used this method with a vacant portion of the property.
- CAM expenses for the year: $100,000
- Occupied space: 12,000 SF
- $100,000 / 12,000 SF = $8.33 PSF
Since most of the maintenance costs will remain the same, even though only a portion of the building is occupied, each tenant's share of expenses is significantly higher. This is obviously much more favorable to the landlord than it is to the tenants.
With some properties, the tenants don't share the use of the common areas equally. Tenants using less of the shared space may object to paying the same cost per square foot as the other tenants.
Dealing with this situation requires the landlord to determine which expenses each tenant should be responsible for and calculate the charges for each cost separately. A simpler way of dealing with this is to keep the CAM charges the same for everybody, but charge a lower lease rate on the spaces that don't have the same access to the common areas.
One of the most common ways tenants are charged CAM fees is based on the total square footage they occupy. This method protects the landlord from fluctuations in costs and keeps the lease rate slightly lower for the tenant.
Load factor
In some leases, the CAM charges are added to the rent by charging rent on a portion of the common area. Natalie Wainwright, vice president of office tenant representation at LOGIC Commercial Real Estate, explains, "Landlords of a Class A product are more likely to offer a full-service gross lease, which will account for the CAM fees by including the common area."
The common area is included in the rent as a load factor. The load factor calculates the percentage of the building used as a common area and adds that percentage to the leased space's usable square footage. This gives you the rentable square footage on which the rent payment is based.
Wainwright gives this example: "If a tenant is paying rent on a space based on 5,000 rentable square feet, but only has 4,500 of usable space, they are paying roughly 10% as a load factor."
For example:
- Building size: 100,000 SF
- Common area space: 10,000 SF
- 10,000 SF common area / 100,000 SF total square footage = 10% common area
- Usable square footage + 10% load factor = rentable square footage
Fixed CAM costs
Fixed CAM charges are becoming more common in commercial real estate leases. According to the International Council of Shopping Centers, several property managers and asset managers are seeing shopping malls simplifying their CAM fee structure by switching to fixed CAM charges due to demand from anchor tenants.
With fixed CAM charges, property owners set a flat fee for common area maintenance and usually add small annual increases to that fee to cover inflation. Tenants may still want to review the property expenses to ensure their CAM charges aren't significantly higher than they should be.
In addition to actual maintenance charges, fixed CAM charges can either apply to property taxes and insurance or only apply to maintenance costs, leaving the property taxes and insurance adjustable.
REITs more commonly offer a fixed-fee structure as opposed to smaller independent investors. Smaller investors could be in trouble if expenses increased far beyond the set CAM charge, while larger REITs can absorb those costs more easily.
Capped charges
When the CAM charges are based on actual costs, a tenant may want to negotiate a cap on how much they will be required to pay for their share of common area maintenance. Putting a cap on CAM charges helps protect the tenant from their lease expenses increasing outside of their budget or having any sudden surprises at the beginning of the year. In turn, this adds some risk to the landlord to cover additional expenses themselves.
Adding a cap on CAM charges to a lease is often a part of negotiations between the tenant and landlord. The landlord may agree to capping the maintenance costs to get the lease rate they want.
Whatever else a tenant and landlord negotiate
Unique situations may require costs to be calculated in a special way, and the method of calculating CAM charges may be different from what's spelled out in the current lease terms of another tenant occupying space in the property. The landlord may agree to exclude certain costs in the charges for one tenant or may even abate all or a portion of the CAM charges for a set period.
CAM tips for tenants and landlords
CAM responsibilities can be spelled out in a lease, but both tenants and landlords should keep in mind that they're called "common" areas for a good reason. Here are some tips for both parties to make sure that common areas don't adversely affect a tenant-landlord relationship. Tenants should:
- Not leave clutter in common areas.
- Properly dispose of trash.
- Clean areas regularly where needed.
- Be aware of the impacts on shared spaces.
- Promptly report maintenance issues.
For their part, landlords should:
- Ensure that landscaping and exterior maintenance are done in a timely manner.
- Regularly inspect emergency exits, fire exits, cameras, access panels, and any other safety-related features.
- Inspect and service heating and cooling units, as well as plumbing and electrical fixtures.
- Control pests in common areas.
- Ensure all common areas are well-lit.
