Many businesses, including manufacturers, prefer leasing workspaces over buying commercial real estate. It costs less, is usually tax-deductible, and gives you additional flexibility if the business is still in its early growth stages. 

However, negotiating a commercial lease for your business can get quite complicated. Along with familiar terms like rent costs, property taxes, and security deposits, you may come across something called “common area maintenance.” 

In this post, we’ll explain what common area maintenance is, how it is calculated, and when it is applicable. 

Let’s dive in!

What is common area maintenance?

A commercial building usually has multiple businesses occupying separate spaces as tenants. Common area refers to the space outside the offices/shops occupied by tenants – lobbies, hallways, elevators, parking lots, and public bathrooms fall into this category. 

The tenants usually have equal access to these spaces and benefit from their regular usage. If you are a tenant in an office building, any common space outside your office walls but within the property can be considered a common area. 

The responsibility of maintaining these spaces usually falls to the landlord. This is what is meant by common area maintenance. It is a major operating expense in commercial real estate, along with insurance and property taxes. 

Since all tenants benefit from proper maintenance of these spaces, it is customary for landlords to charge fees to cover the common area maintenance expenses like landscaping, HVAC repairs, elevator maintenance and repairs, and so on.  

What expenses are included in CAM charges?

For tenants, CAM charges can include any expense incurred in the maintenance of common areas by the landlord. This includes the following types of expenses:

The charges involved can vary widely depending on the type of lease and, more importantly, the type of commercial space involved. 

There are three major types of commercial properties: office, retail, and industrial. 

Office CAM expenses

Office buildings usually have the widest array of different types of common areas, including lobbies, bathrooms, stairwells, elevators, hallways, and more. Landlords have to pay more for janitorial services and other types of maintenance. 

Furthermore, electrical charges are usually metered across the entire building since most offices usually have similar consumption rates. As a result, both janitorial costs and electricity charges are factored into office CAM expenses, along with parking and landscaping. 

Retail CAM expenses

Office buildings and retail spaces have a similar breakdown of CAM expenses, with two notable exceptions. Unlike offices, retail stores can have widely varying electricity demands. Tenants are usually sub-metered and pay their electrical charges separately. 

Likewise, janitorial is less of a factor due to the lower incidence of common spaces inside a retail property. There are fewer lobbies or hallways when compared to an office building. For retail tenants, janitorial expenses are usually not a major factor in their CAM charges. 

However, retail buildings often have additional common areas with heavy maintenance costs – driveways, loading docks, delivery areas, and sidewalks attract a lot of activity and wear and tear. They can make up the bulk of common area maintenance expenses. 

Industrial CAM expenses

A CAM expense bill for an industrial tenant will have fewer items on it, compared to either retail or office clients. This is because industrial spaces don’t require many of the public amenities found in other commercial spaces. 

Like in retail CAM, electrical and janitorial charges don’t matter in industrial CAM. Charges usually arise from common area lighting, landscaping, parking lot/sidewalk/driveway maintenance, loading docks, and delivery areas.  

The graphic below showcases the commercial property types mentioned above, and the CAM expenses they include.

Types of commercial properties and CAM expenses they include. Source: AQUILA

How landlords determine total CAM estimates

Landlords have to prepare an annual maintenance budget for CAM expenses at the beginning of each year. In a pre-existing commercial property, a new landlord can easily estimate the amount they need to charge tenants, based on accounting books from the past 3-5 years. The landlord can either get the average amount or pick the highest number. 

If the maintenance expenses don’t exceed the projected estimates, the tenants may receive a refund or credit at the end of the year. If the opposite happens and the expenses exceed the amount charged, the tenants will be asked to pay additional charges (if the lease agreement permits it). 

However, if the commercial property is brand new, the landlord may have to take some additional steps to get a rough estimate of the expected maintenance expenses. Sources of information include: 

• Bill estimates from utility companies.
• Estimates from contractors for security, garbage disposal, HVAC maintenance, etc. 

From a CAM projection perspective, expenses can be divided into two types: 

1. Controllable CAM expenses. These are fixed costs that do not vary and do not depend on the current or future occupancy of the tenancy units in the building. Things like snow removal, security expenses, and administrative expenses have to be paid regardless of how many tenants use the building. 
2. Uncontrollable expenses. These expenses can vary depending on occupancy rates and usage patterns of individual tenants. Building and HVAC systems maintenance can increase due to increased wear and tear. Utility bills like water, gas, and electricity will also increase as more people use them. 

How are CAM charges calculated for individual tenants

Once the landlord has an estimate of annual CAM expenses, they may choose to split it between tenants in several different ways. Some methods focus on simplicity and easy accounting, while others require more complex bookkeeping measures. 

Pro rata share of square footage

According to the National Association of Realtors, this is the most common method adopted by landlords. Pro rata means proportional – a tenant’s share of the CAM charges will be proportional to their share of the total square footage of the building. 

Depending on the occupancy rates inside the property and the landlord’s decisions, pro rata can be calculated in two main ways: 

1) Based on the total available space 

Consider a commercial property with the following features: 

• Building size: 50,000 sq. ft. 
• Annual CAM expenses : $500,000
• Space used by Tenant A: 10,000 sq. ft.

To proportionally allocate the CAM charges, follow these steps:

1. Divide total expenses by building size to get charges per sq. ft.: $500,000/50,000 = $10 (the amount to be charged per sq. ft. from each tenant)
2. The total annual pro rata share of CAM charges for Tenant A would be: 10,000 * $10 = $100,000

2) Based on total occupied space

Many buildings don’t have 100% occupancy rates. In such situations, the landlord may choose to calculate the pro rata share based on total occupied space instead of total building space. In the previous example, assume that 10,000 sq. ft. is lying unoccupied. 

Using the same process, you can calculate the charges per sq. ft. as follows: $500,000/40,000 = $12.5

As you can see, this method increases the CAM burden on each tenant in the building. Tenant A would end up paying $125,000 if the landlord chose to calculate CAM charges on occupied space instead of total space. 

Load Factor

In some leases, the tenant’s share of the CAM is added to the rent amount. This portion added to the rent is called the load factor. In this method, rent due from a tenant is not calculated solely on the space leased for actual use. 

Instead, the rent also includes a payment for load factor, based on what percentage of the total building space is allocated to the common area. Here is an example: 

• Building size: 50,000 sq. ft.
• Common area: 5,000 sq. ft
• Space used by Tenant A: 10,000 sq. ft.
• Rent per sq. ft.: $200 

The landlord will first calculate the common area as a percentage of the total area: (5,000/50,000)* 100 = 10%. This is the load factor. 

In the absence of a load factor, the tenant would be paying $200*10,000 = $2 million as rent. 

With the load factor, the rentable area for that tenant is 10,000 sq. ft + 10% load factor = 11,000 sq. ft. 

The total rent due from the tenant would be higher in this case, with $200*11,000 = $2.2 million. The $200,000 here is the additional charges paid by the tenant for common area maintenance. 

Fixed CAM charges

These days, larger real estate firms and investor trusts (REITs) have started offering fixed CAM charges to tenants in commercial leases. Shopping centers and malls in particular use this simplified system in part due to pressure from large/anchor tenants. 

Here, tenants are asked to pay a flat fee along with their rent for common area maintenance. The landlords are free to make minor increments to the fee each year, in line with the ongoing rate of inflation. 

Some lease agreements include taxes and insurance in the mix for fixed charges. In others, they may be charged separately. Fixed charges can put the landlords at a disadvantage if maintenance expenses suddenly spike well above the set charge. 

CAM payments and different types of commercial leases

Commercial lease agreements broadly fall into 3 or 4 categories, based on the content, rules, and stipulations. The application of CAM charges can vary widely between these different lease types.

Triple net lease (NNN)

Let’s start with the lease agreement where there are no CAM charges. In an NNN lease, also called an absolute triple-N lease, the tenant handles all the expenses directly, including utility bills, tax payments, insurance, and other maintenance services. The landlord has no responsibilities. 

Triple net leases are very common in retail, warehouse, and other commercial real estate situations where a single tenant inhabits the premises. Fast food restaurants, drug stores, car washes, convenience stores, and gas stations all use NNN leases. 

Landlords have fewer headaches in this system but often have to provide a lower rent rate to the tenants. The system is a bit of a mixed bag for the tenants since handling maintenance is an additional burden. Some businesses are better equipped to handle this than others. 

Double net lease

These are also called modified triple net leases or non-absolute NNN leases. In this arrangement, the landlord will handle some maintenance, for parking, structure, etc. The tenant handles the rest on a pro-rata basis, paying their share of other CAM charges, taxes, and insurance. 

A modified NNN lease is also quite common in retail properties where multiple tenants share the building. Office complexes, some industrial buildings, medical facilities, quick service restaurants, and child care/early learning centers may prefer this type of lease arrangement. 

Gross lease 

Also called a full-service lease, this one involves a lump sum payment from the client for rent, CAM charges, and other operating expenses. All additional charges borne by the landlord as operating expenses will be built into the base rent from the outset. 

The first year is called the base year. After the end of the base year, the landlord may increase the rates to accommodate any increases in operating expenses. Full-service leases are commonly used in multi-tenant office buildings, industrial warehouses, and retail centers. 

Modified full service

Full-service leases can be tweaked to include or exclude certain CAM expenses from the base rent, or even adjust a particular tenant’s base rent for increased use of common areas. The tenants’ shares are often calculated on a pro-rata or load factor basis. 

CAM handling tips for landlords

Landlords have to perform a tightrope walk when setting CAM charges. If you set it too high, you may scare off interested renters. On the other hand, if you set it too low, the operating expenses will pile up as losses on your balance sheet. 

1. Pay attention to expense recovery 

You need to keep full tabs on all expenses that accrue under common area maintenance. Calculating the operating expenses can be quite time-consuming, but it is essential to have an accurate idea of how much you need to demand from tenants to stay in the green. 

2. Pick the optimal CAM structure

There is no one-size-fits-all solution for adding common area maintenance to a lease agreement. You have to do your homework and pick the structure that suits your expense recovery requirements in the best possible manner. Decide between fixed charges, pro-rata shares, adjustable payments, and more. 

3. Focus on preventive maintenance

Proactive maintenance and preventive maintenance policies can help reduce the recurrence of expensive emergency repairs. Using a Computerized Maintenance Management System (CMMS) can make a huge difference here, especially in large industrial facilities and warehouses. 

4. Be prepared to negotiate

There are many moving parts in a commercial lease agreement, especially in the area of CAM expenses. Tenants will try to protect their interests by demanding CAM payment caps and operating expense reconciliation. Landlords should be prepared for lengthy and in-depth negotiations involving smart and savvy tenants. 

CAM tips for tenants

Before making a final decision about leasing a certain space, tenants should consider the following tips.

1. Check historical CAM charges before renting

This one is fairly self-explanatory. Landlords always prepare annual CAM budgets and share them with tenants. Try to get some copies of previous budgets if you are interested in leasing space in a building. Compare with other buildings and pick one with a better balance between rates vs facilities.  

2. Always seek clarification 

Numerous expenses can come under the umbrella of CAM charges – you can find these in the annual CAM reconciliation summary provided by your property manager. Make it a point to clarify the source of each expense, especially if things look vague or unmarked. 

3. Try to reduce utility bills

Water, electricity, and gas bills often form a major chunk of CAM expenses whenever they are included in the mix. Tenants can consider pursuing office maintenance strategies that improve productivity while cutting down on operational costs and utility bills. 

4. Stay on good terms with the landlord

There is always room for negotiations and concessions between tenants and landlords on the issue of CAM expenses. If you have a positive relationship with your landlord/property manager, you can make recommendations and friendly requests to get some rebates/discounts in CAM charges. 

5. Know your rights to an audit

If a tenant has reason to believe that they are being overcharged for CAM expenses, they can request a third-party audit of the building’s operating expenses. You can also use the services of a commercial real estate expert, also known as a tenant representative, to protect your rights and interests. 

There you go

Common area maintenance is a topic that can bring out competing interests in tenants and landlords. However, it is entirely possible to create arrangements that are beneficial to both parties. With adequate preparation and honest negotiations, you can lease a commercial property under CAM terms that are fair and transparent.  

If you want to explore other topics in the maintenance, CMMS, and facility management space, continue browsing the Limble blog.