The Significance of Charging CAM Fees
Commercial Real Estate investing is undoubtedly an acquired intelligence that often takes years of experience to understand. Most commercial investors will quickly admit the right property can yield progressive long-term returns but one must properly assess the multitude of variables associated with the investment. One important variable that is often miscalculated in determining the return on your commercial building is properly allotting C.A.M. (Common Area Maintenance a.k.a. Triple Net Charges) to your commercial tenants. This article will hopefully help each investor to realize the importance of such charges and assist in properly negotiating such charges into your next lease.
In Commercial Leases, C.A.M. charges are generally those charges associated with the common area maintenance expenses of a shopping center to which each tenant benefits. Investors are quick to make the tenants pay such charges because it is solely the tenants who benefits from the expense. These charges may range from security guard service to property taxes and everything in between. Although most intelligent commercial investors will incorporate all expenses associated with the property to be allotted to the tenants, some investors may chose to only assess a minimal amount of the expenses or whatever is predetermined when negotiating out the Lease. The expenses are generally combined in amounts then divided up to the tenants based on the amount of square footage the tenant occupies based on the entire square footage of the shopping center. For instance, a monthly landscaping bill of $100 for a shopping center with five tenants who each occupy 1000 sq. ft. will typically be divided then charged $20 per tenant for such service. For accounting purposes you may chose to bill the tenant monthly, quarterly, or on an as-billed basis as specified within the Lease Agreement. Most professional management companies analyze the previous years expenses and determine a cost per square foot to be projected for the upcoming year and paid monthly by the tenant.
Although this is the general concept of C.A.M. charges, one must take into consideration the Lease itself prior to allotting C.A.M. charges. To assess charges to the tenant, you must first determine in the lease if legally you can charge the tenants for such costs. Few managers realize that with the proper notification, C.A.M. charges can easily be assessed to a month-to-month tenant.
If C.A.M. charges are demanded in the preliminary negotiation of the Lease, tenants rarely dispute the charges knowing they are the actual parties benefiting from the expense. If your Lease does not allow for such charges it is imperative you negotiate the charges into new Leases and when old tenants are up for renewal. Upon incorporating such charges to the center, the commercial investor will quickly gain proper control over the actual investment expenditures. Lessor control over the C.A.M. will allow the tenant to incur the rising cost of utility bills, maintenance, and property taxes. This factor alone may increase the investor’s return by 10% to 30% or even more.
C.A.M. charges are often underestimated when figuring the value of commercial property. Effectively allotting CAM charges can often increase the rental value of your property by $0.20 to $0.35 per square foot. Intelligent investors will quickly realize the importance of such charges to ensure the maximum return on their investment regardless of the age, location, and layout of your building.
It is essential the Commercial Leasing Agent with your Property Management Company be able to give you great insight into the importance of allotting CAM charges to your tenants. If your property currently does not assess C.A.M. charges work closely with a professional management company or legal counsel to implement a specific management strategy to begin charging the tenants upon Lease renewals. With the proper negotiations and explanation, your tenants should consent to paying the charges. This consent combined with the proper legal structure of your Lease will allow you to budget preventative maintenance and larges expenditures such as asphalt, roofing, or exterior painting as the expense of the tenants. Allotting CAM charges is truly the only way to maximize the most return on your valuable investment.
Written by Brian Gordon
Brian Gordon (RE Lic#01302670) is the president and broker of record for Lotus Property Services, Inc., a property management company based in the San Gabriel Valley. Lotus Property Services, Inc. manages multi-unit residential and commercial properties throughout the greater Los Angeles area. Brian can be reached at (626) 582-8001 or brian_gordon@sbcglobal.net
