Common Area Maintenance Charges in Commercial Leases
Common Area Maintenance (“CAM”) charges are often seen in a triple net (NNN) commercial lease. In a NNN lease, the landlord looks to charge insurance, taxes and common area maintenance costs to tenants.
In this article we discuss CAM charges and how landlords and tenants look at them in the commercial lease context. We also discuss common points of contention and negotiation.
What Is Common Area Maintenance (CAM)?
Common area maintenance charges relate to the costs of upkeeping portions of the property that all tenants enjoy.
Essentially, tenants pay CAM to compensate the landlord for maintenance and operation of the non-exclusive areas of the premises.
What does CAM include?
The lease language defines CAM. There are two main types of costs in running a building: direct and indirect
Usually, CAM will incorporate the direct “common area” expenses related to the building. These direct costs include:
- Parking lot maintenance
- Lobby maintenance
- Vending areas
- Outdoor lighting
Indirect costs can include such as administrative, accounting, and legal fees.
Other costs might include capital improvements, such as repairs to the foundation, walls or roof, plumbing, HVAC, and electrical systems. Because costs can be expensive to address, it’s important that landlord and tenants understand how they are defined to avoid disputes.
How are CAM charges calculated?
CAM expenses are usually calculated on a pro-rata basis using the tenant’s square footage of the leased premises. The larger the space, the bigger the tenant’s share will be.
Is the tenant’s share compared against the property’s total leasable area or simply currently occupied space? A tenant must know how the lease defines this pro-rata share.
Landlords often estimate CAM charges and the tenant pays this estimate each month as additional rent. At year-end, the landlord will review the actual expenses incurred. If the CAM estimates were higher than the actuals, the tenant will get a refund or credit to rent. If the estimate was lower than actual, the tenant will need to pay the difference.
CAM charges are often included as part of the first year’s rent. In following lease year, the landlord may increase the CAM charge if the CAM expenses fluctuate upwards.
Are CAM Charges Negotiable?
CAM charges can be negotiated.
The tenant should look to cap annual expense increases. It may also seek to amortize capital expenses if they are included in CAM.
For example, the cost of a lobby renovation could mean a steep increase for the tenant if charged in one lease year.The tenant could instead seek to spread this cost over the remaining years of the lease to reduce the burden on its cash flow.
Tenants should always make sure they have the right to audit the landlord’s books to ensure that expenses are recorded properly and to receive itemization of expenses at least annually.
A landlord will often charge a percentage management/administrative fee on top of the baseline CAM charges. For the landlord, this fee compensates them for their time in handling maintenance. From the tenant’s perspective, the landlord is renting space and should not tack on extra charges. The landlord and tenant will need to negotiate the proper fee, if any, that is appropriate for the space.
CAM charges are important for any commercial lease negotiation. Tenants and Landlords should not overlook these important terms. Whether you are a tenant or landlord, a lawyer should assist you in understanding and negotiating the lease to protect your interests.