In the world of commercial real estate investing, the term “CAM charges” stands for the costs a landlord charges tenants for common area maintenance (CAM). These costs can entail just about any detail of managing and maintaining a commercial property, from landscaping to painting to trash services and utilities.
Most of the time, adding CAM charges to a lease is beneficial to the landlord, as it enables them to recuperate certain costs involved with owning and managing the property. This, in turn, gives the commercial property owner a degree of protection from cost increases, protecting the property's return on investment. Because of these advantages, it has become an industry standard for commercial properties.
Common area maintenance charges cover a wide array of items that, if neglected, could result in damage to the property that increases the net operational costs. Usually, CAM charges include the various costs of repairing, maintaining, and cleaning the common areas of leased properties that all of the tenants use collectively.
It’s important to note that the itemized costs included in CAM charges are dependent on the type of lease that the tenant and landlord agree upon. These charges can be limited to a few specific aspects of the property or be much broader in scope, covering every expense necessary to keep the property running smoothly and cleanly.
Here are some of the costs generally included in CAM charges:
Other operating expenses could include on-site management staff, security staff, or a number of other costs necessary for the management and maintenance of the commercial property.
Several other operating costs can be included in the common area maintenance charges in a lease, some of which exceed what some people would consider maintenance. These could include:
Some tenants may find CAM charges scary because they could end up with cost increases if CAM charges go up in the future.
Although there’s some risk of costs going up eventually, CAM fees can benefit tenants. When forced to bear every cost of upkeep of common areas, some landlords may put them off instead of handling them expediently. Passing these costs on to tenants generally makes landlords less reluctant to keep up with maintenance, ensuring tenants a clean and well-maintained space.
Adding CAM charges may deter some tenants. Depending on the type of tenants the property manager wants to attract, CAM charges may or may not be a good pricing strategy.
Landlords get protection from fluctuating costs and ensure they always have funding for more extensive maintenance items when it comes time to address them. CAM charges also help ensure commercial real estate investors get more stable net returns. In addition, properties tend to be much better maintained and managed, which benefits the tenants as well.
What determines how CAM fees are charged to a tenant is the type of lease the commercial property owner offers. The following are the basic terms and CAM charges associated with each type of commercial lease.
Triple net leases require tenants to pay CAM charges and shoulder almost all costs of upkeep. In a NNN lease, tenants pay a pro-rata share of the property taxes, insurance, and common area maintenance costs. Normally, the landlord’s only responsibility with an NNN lease is to pay for capital expenditures like improvements or repairs to the building, land, or parking lot.
While most costs are passed to tenants, in many cases, tenants are only responsible for certain repairs up to a specified dollar amount per year, called a "stop," which is similar to how an insurance deductible works.
The majority of retail properties come with NNN leases, such as restaurants, strip malls, shopping centers, and single-tenant properties. When it comes to the investors who back commercial real estate, REITs and other investors often prefer to invest in properties with NNN leases because of the stability they bring for net cash flows.
Net-Net leases only charge tenants their portion of property taxes and insurance, while the commercial landlord covers all common area maintenance costs.
NN leases are less common than NNN leases, but there are advantages for some situations. A NN lease may be attractive to prospective tenants because of their minimized risk of cost increases. Sometimes NN leases are implemented when common area expenses can be shared across multiple properties within an investor's portfolio. In the few instances you do see these lease structures, they’re typically used in more tertiary, and less sophisticated markets.
Net leases aren’t very common. This type of lease only requires the tenant to pay their share of the property taxes, with the landlord covering all other costs, including property insurance and common area maintenance.
Net leases normally have higher rates because of the costs and risks to the landlord. These leases structures are very uncommon.
When the landlord covers all costs, including the property taxes, insurance, and common area maintenance costs, it's called a gross lease. This is a common type of lease encountered by office building tenants.
A gross lease only requires tenants to pay a flat rental rate that doesn’t involve fluctuations in expense recapture from one year to the next. Sometimes with a gross lease, the landlord will even cover the tenant's utilities in the case of a “Full Service Gross” contract, with some going as far as covering janitorial costs for tenants.
It’s important to note that property owners typically structure their leases to maximize their return on investment. While passing CAM charges to tenants is usually the most favorable option for the landlord, the operating costs specific to an individual property may actually provide a higher return with a gross, net, or net-net lease in some markets.
When you’re searching for ways to diversify your portfolio while generating passive income, commercial real estate investing has a lot to offer. When you’d rather avoid dealing with leases and tenants directly but see the potential of commercial real estate, Saint Investment Group can help you get in the game in a way that works for your lifestyle.
Saint Investment Group enables investors to access exceptional commercial property deals with solid returns and stable income streams. Our investors also get access to fund performance data through detailed monthly reporting and deal transparency for ultimate peace of mind. Call (323) 483-0291 today to learn how to get started.
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Nic has honed his focus on the Real Estate and debt markets with Saint Investment Group and pursues large-scale Distressed Asset purchases with his partners and syndications.