What Are CAM Charges in a Commercial Lease?

Every multi-tenant property has space no single tenant occupies, such as parking lots, entrances and shared hallways, and someone has to maintain it. CAM charges are how that cost reaches tenants. You pay them in addition to rent, and they show up mainly in triple net and modified gross leases. In a full-service gross lease, CAM is generally built into the rent, though increases above a base year may still be billed.

The term is used loosely. Some leases use CAM narrowly, for shared-area costs. Others use it for nearly all operating costs, and some office leases say operating expenses instead. Our guide on operating expenses, CAM and taxes covers how those categories relate. This one stays with the CAM pool itself.

There is generally no uniform list of recoverable expenses, and a CAM invoice does not by itself establish that every listed expense is payable. State rules vary, but the practical lesson travels. Your lease is the list.

A typical CAM pool covers the day-to-day operation of shared areas. Common items include these.

• Landscaping, snow removal and trash removal.
• Parking lot upkeep, sweeping, lighting and striping.
• Common-area utilities and lighting.
• Janitorial service for shared areas.
• Security.
• Repairs and maintenance of shared systems.
• A property management or administrative fee, which should have contractual support.

Property taxes and insurance may be part of CAM or billed separately, depending on the lease. Pay attention to that when comparing two properties. A low CAM figure that leaves out taxes and insurance is not comparable with a higher one that includes them.

Landlord forms tend to define the pool broadly. Tenants generally ask for a written list of exclusions, and the list below shows what commonly appears on it. An article in Probate & Property by Scott Fielding and Travis Beaton says landlords almost always accept excluding items such as depreciation, mortgage payments and leasing commissions, and that exclusions such as corporate overhead are more negotiable.

• ✓Are capital improvements and replacements excluded, or spread over their useful life?
• ✓Are leasing commissions and build-out costs for other tenants excluded?
• ✓Are the landlord’s corporate overhead and executive salaries excluded?
• ✓Are mortgage payments and other financing costs excluded?
• ✓Are costs reimbursed by insurance, warranties or other tenants excluded?
• ✓Are repairs for construction defects or landlord negligence excluded?
• ✓Are fines and penalties the landlord incurs excluded?
• ✓Are costs of services that only other tenants receive excluded?
• ✓Is the management fee stated, limited and calculated on a clear base?

Capital items deserve particular attention. Depending on the wording, a capital cost or an insurance premium may fall outside the lease’s operating expense or CAM language, and an express clause may allow recovery, sometimes through amortization. The wording decides it, which is why it is worth negotiating before you sign.

Exclusions are easier to win in the letter of intent, when a landlord is still competing for your tenancy, than after the lease draft has come back.

Your share is usually a fraction. The numerator is your rentable square footage, and the denominator is the rentable square footage of the property. A fixed percentage can also be written into the lease.

The figures below are hypothetical, for illustration. Assume a 5,000-square-foot tenant in a 50,000-square-foot building with a CAM pool of $175,000.

1. Your share is 5,000 divided by 50,000, or 10 percent.
2. Your annual CAM is 10 percent of $175,000, or $17,500.
3. Per square foot, that is $3.50.

The denominator is where disputes tend to start. If the lease measures your share against leased space instead of total space, and only 40,000 square feet are leased, your share becomes 12.5 percent and your annual CAM $21,875. That is $4,375 more for the same services, simply because a neighboring suite is empty. Ask which denominator applies, and whether it changes as the property is remeasured or when tenants leave.

A gross-up clause is a related issue. It lets a landlord adjust variable costs as though the building were full or nearly full. A fair version applies only to costs that actually vary with occupancy. Holland & Hart advises that a tenant should not be responsible for grossed-up amounts in excess of what the landlord actually pays.

CAM is typically billed in two stages. The landlord estimates the year’s costs and bills you in monthly installments. After the year closes, it compares the estimate with actual costs and sends a reconciliation.

Continuing the same hypothetical, suppose you paid estimates of $1,250 a month, or $15,000 for the year. If your actual share is $17,500, you owe $2,500. If it is $14,000, you get a $1,000 credit.

Do not simply pay the true-up without looking at it. A final statement should show eligible expenses and exclusions, correct allocation percentages, any base year and cap calculations, and prior payments and credits. Ask for a detailed statement rather than a lump sum.

1. Compare the statement with last year’s, line by line, and note any category that moved sharply.
2. Check your share and the denominator against the lease.
3. Look for excluded items, capital costs and double billing.
4. Ask the property manager for backup on anything unclear.
5. Note the deadline in the lease to object, and do not miss it.
6. If the amounts justify it, use your audit right.

Do not assume that a dispute stops the clock on payment. Disputing a charge may not suspend payment, and notice and cure provisions may control. Commercial tenants also may not have unrestricted access to CAM records. The lease usually sets that right, so it needs to be negotiated.

Three lease protections do most of the work: a clear list of exclusions, a cap on annual increases in controllable expenses, and a right to review the landlord’s records with a workable deadline. Our guide to expense caps and audit rights covers the second and third in detail.

At Tenant Advisory Group we represent tenants, and when comparing properties we ask each landlord for several years of CAM history in the same format. A low estimate with a history of big true-ups tells you something a proposal will not. Have your attorney review the CAM definition, because the lease language controls what you owe.