BY Barry Hardwick, ccim
Introduction
For many commercial tenants, the intricacies of Common Area Maintenance (CAM) charges can be a source of confusion and frustration. CAM expenses, which cover the costs of maintaining shared spaces in a property, are often a significant component of a tenant’s overall occupancy costs. Understanding how CAM charges are calculated and reconciled is crucial for tenants to manage expenses effectively and prevent disputes with landlords.
What is CAM
CAM is the common or shared operating expenses of a shopping center or commercial property. These expenses are typically broken into Operations & Maintenance, Property Insurance, Real estate taxes:
Depending on the practices of the shopping center or building, some of these expenses may be paid directly by the tenant versus being part of the CAM. When negotiating the lease, it is important for the tenant to know what expenses will be paid by the tenant and what expenses will be paid by the landlord. Additionally, the tenant will want to know what property expenses are paid by the landlord, but not included in the CAM charges: such as capital repairs and replacements, leasing expenses, etc.
Understanding CAM Reconciliation
CAM reconciliation is the process of comparing estimated CAM charges to actual expenses incurred by the landlord during a specific period, typically at the end of the calendar year. Typically, tenants will pay a monthly CAM fee (similar to an escrow account) based on the estimated CAM expenses for the year. For example, a tenant paying $500 per month, will contribute $6,000 annually. At the end of the year, the landlord calculates the total CAM expenses, determines each tenant’s prorata share, compares it to the amount paid, and then sends the tenant an invoice showing the overage or credit if the actual expenses are less than was projected. This process ensures that tenants are paying their fair share of the costs associated with maintaining common areas of the property.
Types of Leases and CAM Charges
Different lease types have varying implications for CAM charges.
Landlord vs. Tenant Perspectives on CAM
Landlords and tenants often have different perspectives on CAM expenses. Landlords emphasize that CAM charges are necessary to cover the costs of maintaining the property and providing essential services to tenants. They may also point to tenant usage as a contributing factor to certain expenses. Tenants, on the other hand, may question the landlord’s cost management practices and feel that they are being unfairly burdened with expenses that should be the landlord’s responsibility.
What Tenants Can Do
Tenants can take several steps to effectively manage CAM charges and avoid disputes with landlords. First, when negotiating the lease, make sure you understand the CAM language and which party is responsible for the various expenses. Negotiate a cap on CAM increases and ask for a history of the CAM expenses to assess the landlord’s management of the property. Keep in mind, when negotiating a cap on CAM expenses, most likely the landlord will agree to cap controllable expenses, but not uncontrollable expenses such as utilities, taxes, insurance, etc.
Once the lease is signed and you are a tenant in the center, you can do the following to manage CAM charges, overages and disputes with the landlord.
The Role of the Broker and Legal Counsel
A knowledgeable tenant rep broker and real estate attorney can help tenants avoid costly surprises and secure favorable lease terms. Don’t wait until CAM reconciliation to uncover hidden costs—be proactive from the start.
Conclusion
CAM reconciliation can be a complex and contentious process, but by understanding the key concepts and taking proactive steps to manage expenses, tenants can minimize frustration and avoid disputes with landlords. By staying informed, proactive, and working with professionals, tenants can ensure they are paying only their fair share, protecting their bottom line and avoiding unnecessary disputes.
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