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CAM (Common Area Maintenance) charges are a universal thorn in the side of retail tenants. From parking lots to water for irrigation, these pesky fees are an unavoidable part of doing business.
How can retail tenants ensure that CAM charges are working for them and not against them?
1. Try to get Fixed CAM Costs in Your Lease
Fixed CAM charges are exactly what they sound like. The property owner will set one flat fee for common area maintenance.
Over time, likely with renewals, that cost will rise due to inflation. But for the life of your lease, the charge amount will remain the same.
This simplified structure can eliminate surprise charges. Much like paying for insurance monthly, the repeated flat rate can protect you in an emergency.
2. Cap Your CAM Charges
If you’re unable to lock down fixed CAM costs, a backup plan is capped CAM charges. The CAM charges would be based on actual costs. However, with a cap, they can’t exceed a set dollar amount.
Tenants are once again protected from unpleasant surprises.
To use our insurance example again, a capped charge would be like paying your deductible.
Capping the charges will come up during lease negotiations. If a capped fee is something that you want, you may have to do a little quid pro quo with your property owner. Lease rates are a common bargaining chip in these scenarios.
3. Do Your Research
Research is vital to the commercial real estate leasing process. First, you want to know what CAM charges have been like historically in your building. Second, you want to know what’s going on in the rest of the neighborhood when it comes to lease rates and CAM charges.
A sophisticated data and analytics solution used by you or your broker could make or break your lease negotiations. If you come to the table with all the knowledge available, you will have the upper hand.
You also want to ensure you utilize the right type of lease. There are many types of commercial real estate leases. Triple Net, Net net, net and gross leases could all be on the table when leasing your new space.
It’s important that your company does the work to understand which type of lease would be best for that place, time and circumstances. While the costs will often even out in the end, how you make the payments certainly matters.
Here’s a primer to get you started:
Triple Net (NNN) Leases: You’re on your own with this one. A tenant takes on almost all responsibilities when they have a triple net lease. Surprisingly, this is one of the most common lease types.
The property owner will focus on capital expenses and the tenant will handle everything else.
PS, this would be a good time to cap your CAM Charges.
Net Net (NN) Leases: The tenant pays a percentage of property taxes and property insurance while the property owner pays for all common area maintenance.
Because the property owner will have more expenses to cover in this scenario, it’s likely that base rents or lease rates will be somewhat higher than with a triple net lease.
Net Lease: A net lease is exceedingly rare. The tenant pays their share of the property taxes while the property owner handles the costs of common area maintenance and property insurance.
Once again, because the property owner is absorbing more costs, it’s likely that the lease rate will be higher.
Gross Lease: While the above mainly apply to retail spaces, gross leases are very common for office buildings. The property owner covers the bulk of the fees – common area maintenance, property taxes and insurance. Sometimes utilities are even included.
The tenant on the other hand, pays a flat rate throughout the life of their lease.
Next time you are negotiating a commercial real estate lease, remember that CAM charges can work for you. Protect your budget and your peace of mind by negotiating well and using all the market data and analytics available to you.