What Are Common Area Maintenance Expenses?
As investors transition from residential to commercial real estate, one of the major differences involves common area maintenance - or CAM - expenses.
CAM expenses are a central element of commercial real estate, and new investors should understand the following major characteristics.
CAM Expenses, Defined
Simply put, CAM expenses are the expenses shared by all tenants in a commercial building. From the landlord’s perspective, they include one pillar of your operating expenses, or “triple nets” (the other two pillars are property taxes and insurance). As a result, CAM expenses are important to understand for:
● The landlord: CAM expenses tell you what operating expenses will be reimbursed by tenants.
● Tenants: Each year, tenants need to reimburse the landlord a proportional share of CAM expenses, meaning that this needs to be incorporated into your own operating budget.
Feel free to drop us a note if you need help reviewing proposed CAM expenses in a commercial lease. This analysis can seem challenging, and we’re happy to help!
How CAM Expenses Differ by Property Type
Each commercial property type tends to include different CAM expenses. The below list is not all-inclusive, but it gives a sense of typical CAM expenses by commercial property type:
Typical CAM expenses for all property types
● Common area lighting
● Landscaping
● Parking lot maintenance
Typical CAM expenses for offices
● Sidewalks
● Electric
● HVAC
● Janitorial services
● Property management salaries and fees
● Window washing
Typical CAM expenses for retail properties
● Loading docks
● Delivery areas
● Administrative fees
Industrial
Besides the typical CAM expenses outlined above for all properties, industrial properties do not tend to pay many CAM items.
Calculating CAM Expenses
The actual calculation of CAM expenses entails an estimate. At the start of each year, the property manager estimates the annual CAM expenses for the entire property.
This CAM expense estimate for the entire property is then divided proportionately, assigning each tenant its pro rata share. Mathematically, a tenant’s share is calculated as follows:
● Tenant’s share of CAM expenses = (tenant’s sq. ft. / gross leasable sq. ft. of the building) x property’s total estimated CAM expenses
For example, assume you lease 5,000 sq. ft. of an office building that includes 100,000 sq. ft. of gross leasable space. If total CAM expenses are projected to be $100,000 for the year, here’s how you’d calculate your annual estimated CAM expenses:
● (5,000 sq. ft. / 100,000 sq. ft.) x $100,000 = $5,000 in estimated CAM expenses
Paying CAM Expenses as a Tenant
Once you calculate the above annual CAM expense estimate, you divide it by twelve and incorporate it into your monthly operating expenses. This way, you can pay your share of CAM expenses in small amounts throughout the year rather than an annual lump sum.
For smaller businesses, this payment structure eases the CAM expense burden on monthly cash flow.
Commercial real estate professionals can help you identify CAM trends in commercial investment opportunities for your market and unique situation. Need help connecting with reliable ones? Drop us a note!
End of Year CAM Credit or Payment
As stated, beginning-of-year CAM expenses are estimates. For tenants, this means that your monthly payments will need to be reconciled with actual results at year end.
If you paid more than actual CAM expenses, you’ll receive a credit.
If you paid less than actual CAM expenses, you’ll need to pay the landlord a lump sum reconciliation payment, or “true-up.”
For this reason, it’s important to understand exactly how your property manager estimates annual CAM expenses, as you want to avoid an end-of-year surprise payment.
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We recognize that, even after outlining the above information, tackling the challenges of common area maintenance expenses in the commercial real estate world can seem daunting.
That’s why we’re here to help. The Pocket Broker team lives and breathes commercial real estate, so drop us a note to see how we can help you achieve your unique objectives!