Negotiating a lease for your business can present big challenges for first-time entrepreneurs encountering unfamiliar terms. Among these, common area maintenance charges, the fees that tenants pay in commercial leases for the maintenance of shared commercial spaces, form a common stumbling block.

David Gerstenhaber, head of national accounts for landlord Brixmor, and Corey Bialow, CEO of national retail tenant representation and consulting firm Bialow Real Estate, shared their wisdom. The result is a comprehensive guide on CAM and key things prospective tenants should know about it.

What Is Common Area Maintenance?

CAM refers to the costs associated with maintaining and managing shared or common areas within a commercial property. Multiple tenants and customers within the establishment use these areas. CAM charges are typically included in the tenant’s lease agreement, and they cover the expenses incurred for the upkeep, repair and operation of these shared spaces like:

• hallways, corridors and entryways
• lobbies and shared reception areas and waiting lounges
• restrooms that are accessible to all tenants and visitors
• staircases and elevators
• shared outdoor spaces like gardens or seating areas
• parking lots, particularly for cleaning, lighting, maintaining and snow removal

“The way I like to explain it is: It’s like a homeowners association fee,” said Gerstenhaber. “You’re paying for the amenities. We don’t have swimming pools and saunas or gazebos, but we do have parking lots, we have landscaping, we have security, we have lights, we have benches. And all tenants share in the cost of their pro rata share.”

What does CAM cover?

The scope varies depending on the lease agreement, but CAM expenses generally cover:

• regular cleaning of common areas to ensure they’re well-maintained and presentable
• fixing wear and tear, replacing light bulbs, repairing elevators, floor maintenance, painting, etc.
• security and surveillance
• landscaping, as at Brixmor’s Marlton Crossing in New Jersey, pictured at top

CAM also could cover:

• the cost of utilities used in common areas, such as electricity and water
• compensation of the property management company that oversees common area maintenance

Why IS CAM Important to Understand?

CAM charges can impact your operating expenses significantly. Small businesses often operate on tight budgets, and understanding CAM helps you plan and budget effectively. Being aware of potential CAM expenses allows you to anticipate costs, avoid unexpected financial burdens and avoid misunderstandings with your landlord later on. CAM fees are also important to understand when comparing different locations. Bialow explained: “Tenants can look at two spaces that are identical, with both, say, leasing for $25 per square foot but one has CAM that’s $3 a foot, and one has CAM that’s $10 a square foot and that’s potentially a big game changer.” In general, CAM costs, Bialow said, range from $2 to $3 dollars a foot in a small neighborhood type center to upward of $50 a foot in a really upscale lifestyle center.

Calculating CAM Charges

CAM charges are typically divided among all tenants based on the proportionate share of their leased space in the total leasable area. The formula generally is calculated by dividing the square footage occupied by the tenant, by the total square footage of the building.

Bialow advises prospective tenants reviewing leases to make sure CAM is calculated according to your actual leased space, not your “leasable” space. For a 100,000-square-foot property, “if you’re taking up 5,000 square feet, you should be paying 5% of the fees. But sometimes landlords might try and say: ‘If we’re only 90% occupied, I’m going to split the CAM between all the tenants that are occupied.’ So now instead of 5%, all of a sudden you could be paying 10%,” Bialow said. “Sometimes mom and pop tenants make the mistake of not noticing the difference between leased and leasable. But a change in that one word could all of a sudden really hurt you.”

The Difference Between Fixed Rate and Pro Rata

Sometimes, landlords offer tenants the option of having a fixed-rate or a pro-rata rate for CAM fees. The difference lies in how CAM charges are calculated and allocated. In a fixed CAM rate, tenants pay a predetermined, constant amount. In that instance, Gerstenhaber described, landlords “give tenants a fixed number and it grows by a certain amount every year.” With a pro-rata structure, by contrast, he said, “there’s reconciliation involved. [Landlords] show tenants the bills, and it goes up and down. Tenants pay their actual pro rata share every year.”
In a pro rata structure, tenants “can win if costs are reduced [in any given] year throughout the term,” Gerstenhaber said, noting that it’s rare but does happen. Tenants “can also lose if there’s a big event [like huge snowstorms] and they get a big CAM reconciliation, which can be hard for them.”

A lot of mom and pop tenants prefer fixed rate, Gerstenhaber said, “because they care what check they have to write every month so they can budget accordingly. With a fixed rate, there’s no surprises.”

Important Considerations

• CAM lease provisions: When leasing a commercial space, carefully review the lease agreement to understand the specifics of CAM charges. Ensure that the lease clearly outlines what expenses are covered under CAM and what are not.
• CAM caps: Some lease agreements may include a CAM cap, which limits the maximum annual increase in CAM charges. This protects tenants from substantial and unexpected cost spikes.
• auditing rights: Negotiate auditing rights in the lease, allowing you to review the landlord’s CAM expense records to ensure accuracy and transparency.
• budget transparency: Request a detailed breakdown of CAM expenses and budgets to understand how the money is being allocated.
• negotiation: For new businesses, negotiating CAM terms can be crucial to managing costs effectively. Aim to strike a fair deal that aligns with your budget and needs.
• participation in decisionmaking: Landlords may involve tenants in decisions regarding major capital expenditures in common areas. Understand your involvement in such matters.
• documentation: Keep a record of all communications and agreements related to CAM charges to avoid disputes in the future.

Questions to Ask Before Signing a Lease

Ask the landlord to provide CAM expense history for the past three years. Make sure, Bialow explained, that there’s a level of consistency. “If CAM goes from $5 one year to $10 the next to $7 the next, something’s off,” he said by way of example.

See if you can speak to other tenants within the center. They have the best firsthand experience with CAM. “Ask tenants how well the landlord maintains the property,” Bialow said. “They’ll tell you pretty quickly whether they do a good or terrible job – whether, for instance, they have to bring in their own snowplow guy or how well they maintain the landscaping.”

Ask who the landlord’s managing agent is. “At big, public companies, there’s a certain expectation that they’re going to manage the center properly,” Bialow said, “but when you’re dealing with ABC LLC and you don’t really know the landlord, you want to know if they have an outside company managing the property. You don’t want to hear it’s the guy’s brother-in-law who does the snowplowing and his son who does the landscaping.”

Ask how landlords divide out tax, insurance and CAM. “When you do a fixed CAM structure, taxes and insurances are not included in that,” Gerstenhaber said. “Tenants should ask and understand that because they are what we call ‘uncontrollable expenses.’ If the city you do business in decides to quadruple the taxes for next year, landlords have no control over that and the tenants have to pay their fair share.”

What does your lawyer think of how CAM is written into the lease? “Nobody should ever enter into a commercial lease without a lawyer,” Bialow explained, “and not just any lawyer but a real estate lawyer. You don’t want your brother-in-law who does divorces looking at your real estate lease.” He added that “there’s a lot of differences in understanding how different clauses apply in different states. In Texas, they can come and padlock your door if you don’t pay rent, while in New York, you could not pay rent for a year and never see the courtroom.”

In general, understanding CAM fosters better communication and cooperation between tenants and landlords. “The biggest misconception I find is that tenants think CAM is a profit center for landlords,” said Gerstenhaber. Indeed, Bialow added, “the intent of CAM is simply to make sure that a shopping center is maintained in a first-class manner.”

After all, people want to shop in a place where they feel comfortable. Gerstenhaber noted:

“You want the center you are located in to be a place your community likes to spend time in.”