CAMs are an essential part of investing in retail project and we have found that many investors that we deal with don't know the first thing about them. In this blogpost we will breakdown the fundamentals of CAMs and why they are important to understand for investors and tenants alike.
What are CAMs?
Common Area Maintenance (CAMs). It is a type of additional rent that tenants pay to their landlords to cover the costs of maintaining and operating common areas in a property. Common areas are spaces that are shared by all tenants in a building, such as lobbies, hallways, restrooms, elevators, parking lots, landscaping, and security. CAM charges are typically calculated based on a tenant's pro rata share of the total square footage of the property.
Why are CAMs important?
CAMs ensures that common areas are properly maintained and kept in good condition. Having an annual budget set each year for the management of the spaces that often get forgotten makes property upkeep much easy and spaces need less large rehabs over time. CAMs are also important because it helps to distribute the costs of maintaining common areas fairly among all tenants which keeps their spaces looking as nice as they can. And of course, having CAMs can help to reduce the overall operating costs for the landlord.
Who typically handles CAMs?
The landlord will often hire a professional property management team to manage their properties and keep all the moving pieces like CAMs under control. A good property management team will create an annual budget and perform a CAM reconciliation each year to balance the tenants CAM payments and keep everything ship shape. Our go to team is Forza Commercial, they do awesome work!
What is typically included in CAM charges?
The specific items that are included in CAM charges will vary depending on the lease agreement, but they typically include the following:
Property taxes: The landlord's property taxes for the entire building.
Insurance: The landlord's insurance premiums for the building.
Utilities: The costs of utilities for common areas, such as electricity, water, and sewer.
Maintenance and repairs: The costs of maintaining and repairing common areas, such as painting, flooring, and plumbing.
Landscaping: The costs of landscaping and snow removal for common areas.
Security: The costs of security for the building, such as security guards and alarm systems.
Administrative fees: A fee that the landlord charges to cover the administrative costs of managing CAM charges.
This list is of course not comprehensive as what is included in CAMs varies between different asset classes but, these are usually the standard costs that are included.
How are CAM charges calculated?
CAM charges are typically calculated based on a tenant's pro rata share of the total square footage of the property. This means that a tenant who occupies more space will pay a higher CAM charge than a tenant who occupies less space. For example, if a tenant occupies 10% of the total square footage of a building, then they would be responsible for paying 10% of the total CAM charges.
For example, if a Dutch Bros Coffee is part a strip center and its square footage is 1,000, and the Center is 10,000. Their share of expenses are 1,000/10,000 = 10%. This means their Pro Rata share is 10%.
Tip about CAMs for Landlords
Negotiate for no cap on CAM charges: Some landlords are willing to negotiate a cap on CAM charges. This will protect your tenants from having to pay unexpectedly high CAM charges in the future. A cap on CAMs is not great for Landlords for a few reasons. You will be fronting money to run the property. When it is time to sell a property, investors will see this as more a hassle because there could be some leakage and lost income. Investors are looking to pass through everything to tenants.
Tip About CAMs for Tenants
Get a detailed breakdown of CAM charges: Before you sign a lease, ask the landlord for a detailed breakdown of CAM charges. This will help you to understand what is included in the CAM charges and to identify any potential areas of dispute. This is very beneficial for tenants to be looking at. The more Tenants don’t have to pay for, the more profits they keep in their pocket.
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