Commercial Real Estate Blog by Madison

CAM Negotiations – What You Need to Know before Signing, Part 1

Common Area Maintenance (CAM) charges can be a contentious issue for Landlords and Tenants alike. CAM charges are one of the net charges billed to Tenants in a commercial lease, and may be charged in addition to base rent.   On one hand, Landlords may feel that their expenses are high, and this is the chance to be refunded for the outlay. On the other hand, Tenants may feel squeezed by the rent, and are resentful of any additional charges.  CAM becomes the rope in a tug-of-war. 

Before entering CAM negotiations, it is important to understand the various aspects that go into factoring CAM charges. Typically, CAM charges are comprised of fees for expenses incurred in the maintenance of the common areas of the property. CAM usually provides for non-capital expenses, such as parking lot sweeping, snow removal, landscaping, common area janitorial costs, common area electricity, etc. CAM is commonly calculated on a pro rata share basis.

That said, historically, there were gross leases in which the CAM expenses were incorporated into the base rent.  Because it was included in the rent, Landlords could not recover for expenses that significantly increased unexpectedly.  That is why there has been a progression over time toward leases in which Landlords developed more sophisticated formulas for the recovery of CAM expenses.  These formulas have led to increased points of conflict within CAM negotiations. 

When entering CAM negotiations, there are considerations for both Tenants and Landlords.  First, let’s contemplate some questions Tenants would be wise to consider when negotiating CAM.

1.  Do capital expenditures count as operating expenses?

Capital expenditures are upgrades to the physical assets of a property, such as roof repairs or the purchase of new equipment. These large ticket items go toward the improvement of the property. A Tenant can argue that property improvement is not an operating expense, and therefore should not be billed as part of CAM.

3.  Are fees tacked onto the management fees?

While the Landlord may have the right to charge administration fees, the Tenant can argue against tacking on management fees over and above these Admin fees. Unless the lease specifically allows for this additional fee, Tenants may object to this as a form of “double dipping.”

4.  How long does the Tenant have to conduct a CAM audit?

The Tenant has the right to audit the Landlord’s expenses. But this right is not carte blanche.  There are specific guidelines. The lease typically provides an audit window. If not, the statute of limitations varies by state, with a standard limit of three years.

5.  Does the Landlord make a profit from the CAM charges?

It is understood that the Landlord is in business to make money.  However, his profits should be gained from the rent itself, and not from the CAM charges. The CAM charges are intended to cover the expenses themselves, without padding the Landlord’s pocket.

In our next post, we’ll look at the questions a Landlord should ask when negotiating CAM.  Stay tuned.

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