As a business owner, signing a commercial lease is a critical step in establishing and growing your operations. While the base rent is often the primary focus, it’s important to thoroughly understand all the additional expenses that may be included in your monthly payments. One such common charge is the common area maintenance (CAM) fee.
CAM fees are a crucial component of many commercial leases, covering the costs of maintaining and operating the shared spaces within a property. Understanding how CAM charges work and what they cover is essential for budgeting accurately and avoiding unexpected costs down the line.
In this article, we’ll dive into the details of common area maintenance charges in commercial leases in Virginia. We’ll explain what CAM fees are, how they’re calculated, and what you can expect to be included. By the end, you’ll have a clearer picture of this common lease term and be better equipped to negotiate favorable CAM provisions for your business.
What Exactly Are Common Area Maintenance Charges?
To understand common area maintenance (CAM) charges, we first need to look at how a commercial lease defines a “common area.”
How Is Common Area Defined in a Commercial Lease?
In commercial real estate, there are two major types of “areas” within the square footage of a commercial property.
Unfortunately, it is not uncommon for the square footage of common areas to be misrepresented or misunderstood. This can lead to discrepancies and potentially affect the actual usable area and allocation of space for tenants.
If you’re thinking of signing a commercial lease, carefully review lease agreements and seek clarity on the delineation of common areas. Protect your best interests by working with an experienced commercial lease attorney.
The specific inclusions can vary by property and can be negotiated as part of the commercial lease agreement. Some landlords may also include a small percentage markup on top of the actual costs to cover their overhead. A thorough review of the lease terms with an experienced commercial lease lawyer will give you a thorough understanding of what your CAM charges will cover.
Who Pays CAM Charges?
In a commercial lease, the common area maintenance charges are paid by the tenants. The landlord is responsible for managing and maintaining the common areas, but the costs are passed on to the tenants on a pro-rata basis.
How Are Common Area Charges Calculated?
The specific calculation for common area maintenance charges can vary but is usually based on the percentage of the total rentable square footage that a tenant’s leased space occupies. This is known as the tenant’s pro-rata share.
For example, let’s say a commercial building has 100,000-square-feet of rentable space, and an individual tenant is leasing 5,000-square-feet of that space. The tenant’s pro-rata share would be 5% (5,000 / 100,000). If the total annual CAM expenses for the building were $200,000, the tenant would be responsible for paying 5% of that, which comes out to $10,000 per year.
The pro-rata share calculation is often detailed in the original lease agreement, but a commercial lease lawyer can help review the specifics and ensure the charges are calculated correctly. They can also negotiate favorable terms around the CAM fee structure during the leasing process.
Is CAM Considered a Part of Rent?
The answer to whether common area maintenance (CAM) charges are considered part of the rent depends on the type of commercial lease agreement. In some cases, CAM fees are bundled into the total monthly rent payment, while in other types of lease agreements, they are billed separately.
In summary, whether CAM charges are considered part of the rent or billed separately depends entirely on the type of commercial lease agreement. In net, double net, and triple net leases, the CAM fees are additional costs on top of the base rent. But in gross leases, the CAM expenses are already factored into the total monthly rent payment. A careful review of the lease documents with an experienced commercial lease attorney is essential to fully understand how these fees will be handled.
What Is CAM Reconciliation?
In addition to understanding how common area maintenance (CAM) charges are structured within a commercial lease, it’s important for tenants to be aware of the CAM reconciliation process. CAM reconciliation refers to the annual accounting and review of the actual CAM expenses incurred by the landlord versus the CAM fees the tenant has paid over the course of the same year.
At the end of the calendar or fiscal year, the landlord will provide the tenant with a detailed statement outlining the total CAM costs for the entire property. This includes things like utilities, janitorial services, landscaping, repairs and maintenance, insurance, taxes, and any administrative fees. The landlord will then calculate each tenant’s pro-rata share of those expenses based on the square footage of their leased space.
The landlord will compare the total CAM fees the tenant has paid throughout the year to their actual pro-rata share of the expenses. If the tenant has paid more than their share, they will receive a credit or refund. Conversely, if the tenant has underpaid, they will owe the landlord the difference.
For example, let’s say a tenant is leasing 5,000-square-feet in a 100,000-square-foot building. Their pro-rata share of the total $200,000 in annual CAM costs would be 5%, or $10,000. If the tenant had paid $11,000 in CAM fees over the course of the year, they would receive a $1,000 credit or refund from the landlord after reconciliation.
On the other hand, if the tenant had only paid $9,000 in CAM fees, they would owe the landlord an additional $1,000 to cover their full share of the expenses.
The CAM reconciliation process is an important protection for tenants, ensuring they are only responsible for paying their fair share of the property’s operating costs. However, it’s critical to review the reconciliation statements carefully with the help of a commercial lease lawyer. This will help identify any potential errors or overcharges.
How to Negotiate CAM Charges
When negotiating the terms of a commercial lease, the common area maintenance charges should be a key point of focus for tenants. CAM fees can significantly impact the overall occupancy costs, so it’s important to work with a commercial real estate attorney to ensure they are fair and reasonable.
Here are some tips for negotiating CAM charges in a commercial lease:
Understand the Landlord’s Costs
Review the landlord’s itemized list of CAM expenses and ask for supporting documentation. This will give you a clear picture of where the money is being spent and whether any of the costs seem inflated or unnecessary. A commercial real estate attorney can help analyze these expenses.
Cap CAM Increases
Negotiate a cap on how much the CAM fees can increase year-over-year, such as a 3-5% limit. This protects you from facing unexpected cost increases down the line.
Exclude Certain Expenses
Try to negotiate the exclusion of certain CAM expenses that may not directly benefit your business, such as costs for amenities you don’t use or security for other tenants’ spaces.
Establish a Baseline
Work with the landlord to establish a baseline for CAM charges based on historical data. This can help prevent the landlord from inflating the initial costs.
Review Reconciliation
Ensure the lease allows you to review the landlord’s annual CAM reconciliation statements and audit the expenses if needed. This holds the landlord accountable.
Negotiate Pro-Rata Share
If your leased space is significantly different in size or use from other tenants, negotiate a custom pro-rata share calculation that better reflects your impact on common area costs.
The key is to approach CAM charges as an area of the lease that is open to negotiation. With the help of a knowledgeable commercial real estate attorney, you can work to structure CAM fees in a way that is fair and fits your business budget.
The Experienced Commercial Lease Attorneys at PJI Law Are Ready to Help
Understanding and negotiating common area maintenance (CAM) charges in a commercial lease can be a complex and daunting task, but you don’t have to face it alone. At PJI Law, our team of seasoned commercial real estate attorneys is here to provide the essential support and guidance you need. Our team is well-versed in the nuances of commercial lease agreements and CAM fee structures. We can help you carefully review your lease documents, analyze the landlord’s CAM expense reports, and negotiate favorable terms to ensure you are only paying your fair share.
Whether you’re a new business owner signing your first commercial lease or an established tenant renegotiating an existing agreement, PJI Law can protect your interests and help you manage CAM costs effectively. We’ll work closely with you to develop a personalized strategy tailored to your unique situation and goals.
Don’t let unexpected or unreasonable CAM charges derail your business operations. Call PJI Law at (703) 865-6100 or complete our online form to schedule a consultation.
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The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information in this post should be construed as legal advice from the individual author or the law firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country, or other appropriate licensing jurisdiction.
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