What are Common Area Maintenance (CAM) Fees in CRE?

David Cohn
Dec 15, 2022
CRE Investment

Common Area Maintenance (CAM) costs are payments made by tenants to landlords to assist with overhead and running expenses for common areas, which are intended for all tenants' use and enjoyment. These spaces include but are not limited to hallways, elevators, public bathrooms, lobbies, parking lots, and building security.

CAM is just one of the three types of operating expenses; the other two are insurance and property taxes. These expenses need to be clearly defined in the lease, so there is no ambiguity about what they entail.

Controllable vs. uncontrollable CAM expenses

Expenses that fall under controllable CAM are relatively stable and don't change with occupancy or usage.

These include ground upkeep, snow removal, administrative salaries, and security. In addition, these fees apply to everyone renting from the premises rather than being charged to only those who use the service or space.

Uncontrollable CAM expenses fluctuate with occupancy, usage, and operations. These could include water consumption, electricity bills, heating and cooling system maintenance, and general building maintenance.

What is included in CAM expenses for commercial properties?

CAM expenses for an office lease, retail property, and industrial warehouse differ based on the types of services included.

Office CAM fees

  • Janitorial costs are typically included. Because of the many common spaces requiring care, such as lobbies, corridors, elevators, and restrooms, janitorial expenses are frequently included in office property CAM costs.
  • Electrical expense is included in CAM costs for offices, too. Power is generally metered throughout an office building as a whole rather than sub-metered as it is in retail and industrial sectors. Landlords expect corporate tenants to work a normal forty-hour week and use roughly the same amount of power per square foot from tenant to tenant.
  • Landscaping, parking lots, and administrative fees are also included because they're shared spaces and services that all tenants use

Retail CAM fees

  • Maintenance fees for sidewalks, driveways, loading docks, and delivery areas make up a significant portion of retail CAM expenses.
  • Electricity is usually not included. However, because retail centers have so many uses, there may be a significant difference in electrical usage. A restaurant, for example, will use far more electricity than a fashion boutique next door. This is why electrical tenants are billed separately for their electric consumption. The only exception to this is property and parking lot illumination.
  • Furthermore, because there is less common space in a retail center (there are usually no lobbies, public restrooms, etc.), cleaning expenses are generally excluded from CAM.

Industrial CAM fees  

  • Typically, commercial CAM expenditures include property and parking lot lighting, landscaping, parking lot care, and water for irrigation. This is because the building's tenants benefit from all of these.
  • Industrial tenants must contract and cover their electrical costs, making these expenses individual and not a CAM cost. Just like retail, industrial buildings are sub-metered because occupants usually use different amounts of electricity depending on their business. For example, a manufacturer and a storage warehouse have entirely other purposes. One will run machines all day long, requiring high electrical costs, while one may only need electricity for a couple of hours.
  • Because there are no common areas such as lobbies and restrooms in industrial properties, janitorial services are privately arranged by tenants and are not included in CAM expenditures.

Calculating CAM fees

If you own a CRE property, you or your property manager need to calculate an anticipated usual area maintenance cost for the building at the start of each year as part of the annual budget.

This allows you to determine each tenant's share of the CAM fees based on the square footage they occupy and the gross leasable space of the building (square footage divided by gross leasable space).

For example, if the CAM expenses for the year are $100,000 and the building size is 20,000 square feet, the computation is:

$100,000 / 20,000 sf = $5 per square foot

Each tenant pays $5 per square foot to cover CAM charges.

CAM fees should ideally be calculated into each tenant's monthly operating expense, allowing them to pay it in small increments over the year.

Square footage is one of the landlords' most common metrics to charge CAM fees.

This method protects the landlord from sudden changes in costs. However, tenants don't use shared areas in some commercial properties equally.

Those who use less of the common spaces may want to pay a lower cost per square foot than others. This may force you as a landlord to determine which fees each tenant should pay and compute each cost separately.

To keep things simple, you can keep CAM fees the same for all tenants but charge lower lease rates for spaces with less access to the common areas.

Some special circumstances may necessitate an alternative calculation technique, and the method of calculating CAM expenses might vary from tenant to tenant.

As the landlord, you may agree to remove specific costs for one tenant or even lower all or some of the CAM fees for a set time frame.

The rise of fixed CAM costs

Fixes CAM charges are becoming increasingly popular in commercial real estate leases. According to the International Council of Shopping Centers, many property managers and asset managers have switched to a fixed model because anchor tenants demand this arrangement.

Fixed CAM charges can apply to property taxes and insurance or maintenance costs while adjusting the latter.

To set a fixed charge for common area maintenance, make small yearly increases to account for inflation. It's essential to think about the profitability of your property, too.

Can you absorb the extra costs if expenses unexpectedly exceed the predetermined CAM charge?

REITs and more significant commercial properties may be able to do this, but many smaller investors will need help to cope.

Capped charges

Tenants who are charged CAM fees based on actual costs might want to negotiate a limit or maximum on much they are required to pay.

Capping CAM charges helps tenants avoid any sudden surprises, but it adds risks for you as a landlord, as you have to cover additional expenses.

A cap on CAM costs may be included as part of the lease agreement. It can help you secure the lease rate you're asking for, but it may also affect the portability of your property.

Calculating CAM projections

Accurately estimating your property's common area maintenance costs is one of the pillars of running a profitable CRE business. There are several ways to increase the accuracy of your CAM projections.

One way is to check the last three to five years of CAM expenses and go with the highest number. Doing this allows renters to plan for the extra cost, and you'll have an easier time getting paid.

In addition, if the total costs end up being less than expected, tenants will get a credit or a refund for what they overpaid.

If data from previous years is unavailable (for example, if you recently bought a new CRE property), then CAM will take more effort to calculate.Try contacting relevant utility companies to obtain utility bill estimates.

Many utility companies will provide a yearly summary of your building's usage, broken down by month. This makes it easier to predict use in the coming year.

You can also contact contractors such as security systems, landscaping, snow removal, trash collection, window washing, HVAC maintenance, and so on, and ask them to provide quotations for their services on your property.

After you've gathered all the information, raise the total numbers to include unforeseen expenditures and any required repairs or maintenance.

CAM reconciliation

CAM reconciliation refers to the final accounting of charges at the year's end. If the CAM expenses are lower than estimated, you and the tenants will receive a credit for the difference.

However, if the costs exceed the estimated, you may need to shoulder this lump sum difference.

This is where having an excellent property manager makes all the difference. Proactive property managers should be able to detect these overages well before they happen and will revise the estimated CAM expenses for the year accordingly.

This can help you avoid the expense of writing an extensive check for the lump sum later.