Why Do Commercial Leases Include CAM Charges?

CAM charges are extra costs in a commercial lease that all tenants pay to help care for shared areas. They encompass all the expenses needed to ensure common areas are properly maintained and distribute the cost amongst tenants.

Different Categories Of Common Area Maintenance  Charges

CAM charges fall into well-defined expense classification groups. Commercial landlords and tenants can utilize different categories to allocate CAM charges accurately. The main categories include:

  • Fixed CAM Charges: This type of CAM fee is usually predetermined and includes routine expenses related to the maintenance and upgrading of common areas. Fixed CAM charges may consist of janitorial services, landscaping, pest control, and other fixed costs.
  • Variable CAM Charges: Variable common area charges are unpredictable, fluctuating expenses that may arise due to unexpected repairs, renovations, or increases in utility bills. Examples of variable service charges include emergency repairs, damage caused by natural disasters such as floods or hurricanes, or changes in utility rates.
  • Administrative CAM Charges: This type of CAM charge covers the costs associated with administering CAM charges. They may include accounting fees, legal fees, and other expenses related to the administration of CAM fees.
  • Capital Expenditures CAM Charges: Capital expenditure CAM expenses include expenses related to major repairs, replacements, or improvements, such as replacing heating, ventilation, and air conditioning systems, replacing carpeting, and upgrading lighting fixtures, as well as other capital improvements.

Common CAM Charges

CAM charges may vary based on the lease agreement and the building's location, age, and service quality. Examples of CAM charges include:

  • Utilities: This is the share of the utility companies' electricity, gas, and water bills for the common areas. The tenants allocate these costs according to their share of the living space.
  • Cleaning and Maintenance: Charges for cleaning communal areas, including garbage collection and snow clearance, are further examples of CAM charges. The cost of maintaining common areas such as elevators, lobbies, and parking lots also falls under this category.
  • Security: Security services in the common areas of the commercial property can be added to the service charges as they are necessary to ensure the safety of tenants, visitors, and the property.
  • Renovation and Repair: CAM charges are often used to fund renovation and repair work in the property's common areas. These renovations may include communal bathrooms, a gym, or changes in common areas.
  • Property Insurance: CAM fees can also include insurance premiums for the communal area, allowing tenants to benefit from favorable group rates compared to individual policies.

The Sum Of Expenses Method

The Sum of Expenses Method, or the Operating Expense Method, is a comprehensive and precise method of calculating CAM charges in commercial leases. The calculation of the Summation of Expenses method accounts for all shared expenses associated with common areas, including maintenance, repairs, and other costs.

Calculating CAM Charges Using The Sum Of Expenses Method

This method is calculated by adding up the landlord’s total CAM expenses for a given billing period (usually one year), including fixed and variable common area expenses. The total costs are manually divided by the total rentable square footage to arrive at the CAM cost per square foot. CAM costs calculated using this method are typically expressed as a dollar amount per rentable square foot.

If a building has 100,000 square feet and you rent 10,000 square feet, your company uses 10% of the entire building. Your share is based on how much space you rent compared to the total space that can be rented in the building. If more tenants join or some leave the building, each tenant's share may change according to their new share of the occupied space.

Advantages Of The Operating Expense Method

This method is more methodical, precise, and, therefore, more reliable and transparent than other CAM calculation methods. It ensures tenants pay the exact expenses for their rented space while avoiding ambiguities and additional disputes.

It’s also more transparent than other methods of calculating CAM charges as it provides a full cost breakdown of CAM expenses in the building. Tenants can review the calculations of the landlord or building management committee to justify the CAM charges in detail.

Disadvantages Of Using The Sum Of Expenses Method

While the Sum of Expenses method is accurate and transparent, it can be more complex than the GLA or load factor CAM calculation methods. CAM expenses are calculated for the entire building, and it can be more difficult to determine the total costs associated with a particular tenant's leased space.

There may also be lags in recording the expenditure. This delay can occur when recording the total spending for a financial year and can lead to difficulties in ascertaining a CAM amount that is equitable and sufficient.

The Gross Leasable Area (GLA) Method

The Gross Leasable Area (GLA) Method is commonly used to calculate CAM charges in commercial leases. The GLA method divides the total square footage of leased spaces by the total GLA of the commercial building to determine each tenant's proportionate share of the common area costs.

Calculating With The Gross Leasable Area Method

The GLA method is calculated by dividing a tenant's leasing space by the total leasable area of the building. This calculation is expressed as a percentage, then multiplied by the total CAM fees to determine the tenant's share of the expense for the common areas.

Assume a commercial building of 30,000 square feet with five tenants, where Tenant A leases 2,000 square feet, Tenant B leases 4,500 square feet, Tenant C leases 6,000 square feet, Tenant D leases 8,500 square feet, and Tenant E leases 9,000 square feet. The total rentable area is the sum of the square feet of all tenants, i.e., 30,000 square feet.

Tenant A's share of the leased space is 6.67% (2,000 divided by 30,000), Tenant B's is 15% (4,500 divided by 30,000), Tenant C's is 20% (6,000 divided by 30,000), Tenant D's is 28.33% (8,500 divided by 30,000) and Tenant E's is 30% (9,000 divided by 30,000).

Assuming the total CAM costs amount to $200,000:

  • Tenant A's CAM charge will amount to $13,340 with a CAM charge of $6.67 per square foot (6.67% times $200,000)
  • Tenant B's CAM charge will amount to $30,000 with a CAM charge of $6.67 per square foot (15% times $200,000)
  • Tenant C's CAM charge will amount to $40,000 with a CAM charge of $6.67 per square foot (20% times $200,000)
  • Tenant D's CAM charge will amount to $56,660 with a CAM charge of $6.67 per square foot (28.33% times $200,000)
  • Tenant E's CAM charge will amount to $60,000 with a CAM charge of $6.67 per square foot (30% times $200,000).

Advantages And Disadvantages Of The GLA Method

The gross leasable area method is simple and easy to calculate, making it widely accepted for calculating CAM charges. It proportionately reflects the different square footage of leased spaces occupied by tenants, ensuring that tenants occupying a larger percentage pay a higher CAM fee than tenants occupying smaller square footage spaces.

It promotes fairness, transparency, and consistency by utilizing percentage allocation based on your ability to understand the exact specifications of the leased space you're occupying.

However, it doesn’t consider the relationship between the tenant's usage patterns of shared areas and their leased space. Tenants who use the common area more frequently may pay the same CAM fee as those who don’t use the common areas optimally. Additionally, the GLA method may not consider the additional services specific to a tenant's needs.

The Load Factor Calculation

The Load Factor Calculation is a widely used, equitable method to allocate the share of CAM expenses among commercial tenants. This method considers the proportion of the leased space and useful square footage required for conducting daily business operations of each commercial tenant.

Calculating Load Factor CAM Charges

The load factor is a calculation that uses the rentable square footage (RSF), which includes both usable square footage (USF) and the building's common areas, to direct the tenant's proportion of CAM Charges. The rentable square footage is calculated by adding the tenant's usable square footage and multiplying it by the load factor, resulting in rentable square footage.

The load factor varies by building but often falls between 1.10 and 1.20. For example, if a tenant's usable square footage is 2,000 square feet and the rentable square footage is 2,500 square feet, their load factor is 1.25 (2,500 divided by 2,000).

Once the load factor has been determined, the CAM charges for each tenant are calculated using the same method as the Gross Leasable Area (GLA) method. The product of the tenant's leased area and the occupancy factor is the tenant's proportionate share of the CAM fee in a shared area.

Benefits Of Using The Load Factor Calculation

With the load factor method, tenants only pay for the space they occupy and use. Tenants with larger spaces, such as retailers or restaurants, pay more CAM fees, while tenants with smaller spaces pay less. The differences in CAM costs between tenants depend on how much space each tenant occupies, not on the terms of the leases.

The load factor method allocates CAM costs based on usable square footage and thus provides more equity than the Gross Leasable Area (GLA) method because it takes into account the amount of manageable space each tenant rents that other tenants use. The GLA method makes comparing tenants' leases with different amounts of leasable space challenging, whereas the load factor method avoids this problem.

CAM Fees And Different Lease Types

CAM fees are common in different leases, so tenants need to understand how CAM fees work in different commercial real estate scenarios. The different uses of space in different commercial properties can affect how a tenant's CAM fees are calculated, regardless of the lease agreement they enter.

Triple Net (NNN) Lease

In a triple-net (NNN) lease, the CAM costs are traditionally placed solely on tenants. NNN leases are common in retail space, where the landlord calculates all operating and maintenance costs associated with the property and allocates the costs to tenants on a pro-rata basis based on square footage or other definitions outlined in the lease agreement.

This arrangement favors landlords as it helps them hedge the risk of uncertain expenses associated with operating the commercial property. However, it can be burdensome for tenants, so some tenants avoid renewing their leases, which could be quite expensive and inflexible.

Full-Service Lease

Full-service leases are common in office buildings, where landlords provide tenants access to various services, including janitorial services, property management, utilities, maintenance and repairs, and other management services specified in the lease.

Since CAM fees are included in the rental price, the tenant doesn't incur additional costs and, unlike other rental forms, doesn't have to analyze the CAM fees. This offers companies a high level of convenience, comfort, and support.

Full-service leases benefit tenants in industries with high demand and high turnover expectations for staff. Companies that require high technology or data support, start-ups, and other small businesses value a full-service lease. Tenants can focus on other core aspects of their business instead of being burdened with daily maintenance, cleaning, or operating costs.

Modified Gross Lease

In a modified gross lease, landlords pay for some expenses related to the operation and maintenance of the building. These expenses may include large operating expenses such as taxes, insurance, repairs, and maintenance costs, while smaller expenses such as landscaping and janitorial services may be included in CAM expenses.

If negotiations go smoothly and clearly, tenants and landlords can have an equitable share of expenses. This method of allocating utilities spreads the financial obligations between landlords and tenants. It’s usually suitable for small business owners or young companies with limited financial ability to pay all the utilities themselves.

In modified gross leases, landlords assume the larger operating and maintenance costs, including the cost of the building's exterior, while tenants bear the CAM charges for smaller and more manageable expenses associated with their leased office space. This allocation of CAM costs is consistent with both parties' shared use and maintenance of the space.

Best Practices For Managing CAM Fees In Commercial Real Estate

Managing CAM fees well can save money and cut down on disagreements. Some practices tenants can incorporate to avoid any future hassle include:

  • Know your lease terms inside out. Ensure you understand each part of the CAM charges in your contract.
  • Request a detailed expense breakdown each year. This helps you see what you're paying for and checks if the costs make sense.
  • Keep an open line of communication with your landlord. Talk about any CAM charge concerns as soon as they pop up.
  • Set a yearly meeting to go over CAM charges. Use this time to review expenses and discuss changes for the following year.
  • Agree on caps for CAM fees. This can stop unexpected high costs from hitting tenants.
  • Use a good property manager who knows how to keep operating expenses low while taking great care of the property.
  • Check the shared space often. Make sure that maintenance is happening as it should be.
  • Compare your CAM fees with other buildings in South Florida. This will tell you if you are paying too much.
  • Look into using technology like software that helps manage properties. It can track costs and make reports easier to understand.
  • Get advice from experts in commercial real estate. They can give tips specific to South Florida business needs.

Want To Have Us Look At The CAM Fees In Your Lease?

We understand that CAM fees can become complex and costly, possibly straining landlord-tenant relationships. That's why it's in your best interest to consult with an experienced commercial tenant representative on your lease agreement before you sign. We've provided commercial real estate tenant advisory services in South Florida for more than 30 years and can assist you with everything from location prospecting to lease negotiation.

Contact Jasper Realty Advisors today at 954-848-2876 or click here to schedule a consultation with one of our advisors now.