Decoding cam reconcilitation: a tenant’s guide to managing common are maintenance charges

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:

  • Operations and Maintenance can include exterior utilities, maintenance of the parking lot including potholes, sweeping, snow and ice removal, seal coating and striping, trash removal, pest control, landscaping, signage, life safety systems, building maintenance roof repairs, and administrative / management fees.
  • Building Insurance for casualty and liability coverage and property taxes charged by the local governments. CAM can also include capital repairs and replacements.

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.

  • Timeframes and Clauses: While ideally, CAM reconciliation should occur quickly (February or March of the following year), it often takes longer. Leases may specify a timeframe for landlords to complete the reconciliation, often within 90-120 days after the end of the calendar year. However, it’s important to note that this timeframe can vary, and some landlords may complete the process sooner. Leases may also include clauses allowing landlords to revisit CAM charges if unexpected expenses arise, such as a major roof repair or HVAC replacement. This can lead to mid-year adjustments that can catch tenants off guard.
  • Tenant Frustration: Unexpected increases, particularly from capital repairs often lead to frustration among tenants who have not budgeted for these expenses.   Many tenants question why they should be responsible for costs that seem to fall outside the scope of normal building operations.

 

Types of Leases and CAM Charges

Different lease types have varying implications for CAM charges.

  • True NNN Leases: In a true NNN lease, the tenant is responsible for all operating expenses, including CAM, property taxes, and insurance, plus capital repairs and replacements. This provides the landlord with a predictable income stream but places a greater burden on the tenant to manage expenses.
  • Retail NNN Leases: In most shopping center and retail leases, the landlord manages and pays the CAM expenses throughout the year with the tenants paying a monthly CAM fee for reimbursement of the expenses.  The tenant is responsible for their interior maintenance, utilities, etc, plus their share of the operating expenses. 
  • Gross Leases: In a gross lease, the landlord covers all operating expenses, including CAM. This simplifies budgeting for tenants but may result in higher base rent.
  • Modified Gross Leases: These leases fall somewhere in between, with the landlord and tenant sharing certain expenses. The specific terms of a modified gross lease can vary widely, so it’s crucial for tenants to understand the details of their agreement.

 

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.

  • Review Your Lease: Carefully review the CAM-related clauses in your lease agreement to understand your responsibilities and any limitations on charges.
  • Scrutinize CAM Bills: Don’t just blindly pay CAM bills. Compare them to your lease agreement, previous years’ bills, and industry benchmarks to identify any discrepancies or unusual increases.
  • Ask Questions: Don’t hesitate to ask your landlord for clarification on any CAM charges that seem unclear or unreasonable. Request supporting documentation for expenses, especially for major repairs or replacements.
  • Track Expenses: Maintain a spreadsheet or other tracking system to monitor CAM charges over time. This can help you identify trends and potential issues.
  • Negotiate: If you believe certain CAM charges are unfair or unreasonable, try to negotiate with your landlord to reach a mutually agreeable solution.

 

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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