What is Common Area Maintenance?
Common Area Maintenance (CAM) refers to the fees incurred by tenants on top of their base rent that are used to cover routine charges to maintain the shared spaces of a given property.
How Does Common Area Maintenance Work?
Common area maintenance (CAM) charges are separate fees incurred per month on top of the base rent to cover costs related to property maintenance.
CAM stands for “Common Area Maintenance”, and refers to the fees paid by tenants to their landlord for the maintenance of a property’s common area.
The importance of common area maintenance (CAM) tends to be greater for commercial real estate (CRE) properties since there are more tenants and shared spaces in such properties.
- Usable Area → The usable area is the space that leased by a particular tenant. Therefore, the usable square footage in a building is what is occupied by a unique tenant, inclusive of restrooms, private meeting rooms, and individual offices.
- Common Area → In contrast, the common area of a building is not leased to an individual but is rather accessible to all tenants for collective use. These shared areas can include lobbies, parking space, roof decks, and elevators.
So, who pays for the costs related to maintaining the common area?
Since all tenants have the right to utilize the space, as part of the leasing agreement, each of them contribute towards such payments, usually on a pro rata basis.
With those proceeds, the landlord is expected by tenants to ensure the common areas are kept organized and clean, while fixing issues or repairing damages.
What Does Common Area Maintenance Include?
The most frequent types of common areas at properties include the following examples:
- Lobby and Hallway
- Open Area Workspace
- Fitness Center (Public Gym)
- Janitorial Services
- Elevators
- Parking Spaces
- Shared Amenities
- Surrounding Outdoor Areas (Pool)
- Building Security and Alarm Systems
- Concierge Services
- Roofing and Landscaping
For instance, if the elevator shared by all tenants were to malfunction, the landlord is responsible for fixing the problem promptly.
The clause pertaining to common area maintenance (CAM) charges is stated in commercial real estate leases, where the specific terms around the contractual obligations of each party (the lessor and the lessee) are set.
Furthermore, the type of lease signed between the two parties is key to determining each party’s respective obligations, e.g. triple net (NNN).
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The CAM charges matter in real estate, especially for commercial properties, because the fees impact the total cost of committing to a rental arrangement at a given property.
In most leasing agreements, the tenants pay a portion of the total CAM on a pro rata basis per the negotiated agreement, i.e. in proportion with the amount of square footage leased.
The calculation of each tenant’s common area maintenance (CAM) fee, expressed on an annual basis, can be determined by dividing the tenant’s square footage by the gross leasable area in the building.
- Step 1 → Divide the Tenant’s Rentable Square Footage (RSF) by the Gross Leasable Area (GLA) of the Property
- Step 2 → Multiply the Pro-Rata Share (%) by the Estimated Annual CAM Charges\of the Property
- Step 3 → Convert the Annual CAM Charge of a Tenant into a Monthly Fee (Divide by Twelve Months)
Common Area Maintenance Formula (CAM)
The common area maintenance (CAM) incurred by each tenant is calculated by multiplying their respective pro-rata share of expenses by the expected annual CAM charge.
Where:
- Pro-Rata Share (%) = Tenant Rentable Square Footage (RTF) ÷ Gross Leasable Area (GLA)
- Annual CAM Charge = Σ Monthly CAM Fees × 12 Months
Since the tenant CAM charge is an annualized metric, the amount must be divided by twelve to convert into a monthly fee.
Conversely, an alternative method to calculate the CAM charges is on a per square foot (sq. ft.) basis, which is done by dividing the estimated annual CAM fees by the property’s leasable square footage.
Since CAM fees are most often allocated based on the amount of space occupied, the tenants with more space rented will incur more CAM charges (and vice versa).
Common area maintenance is most often calculated on an annualized basis, and then divided into monthly payments attributable to each tenant on a per square foot basis.
Usually at the start of each year, a property owner will project the upcoming common area maintenance (CAM) costs for the entire property as part of the annual budget, which affects pricing.
Broadly put, CAM charges fall under two classifications:
- Controllable Charges → The property owner has direct influence over controllable charges (e.g. administrative costs, staff payroll).
- Uncontrollable Charges → On the other hand, uncontrollable charges, remain outside the property owner’s control and are unpredictable (e.g. snow storm, fire).
However, CAM fee price caps and floors can set constraints on how much rent can be adjusted.
FAQ: Is Capital Expenditure Included in CAM?
For the most part, capital expenditures (Capex) are excluded from common area maintenance (CAM), dependent on the context of the spend.
Why? Capex related the property improvements, such as building a more modern gym for tenants, are a form of discretionary spending (and part of the landlord’s cost of ownership).
However, certain non-discretionary capital expenditures can be categorized as common area maintenance, such as fixing a broken A/C system, which affects all existing (and future) tenants.
Common Area Maintenance Calculator (CAM)
We’ll now move on to a modeling exercise, which you can access by filling out the form below.
CAM Charges Calculation Example
Suppose a property owner is estimating the common area maintenance (CAM) charges expected on their commercial office building for the upcoming year, 2024.
The total annual CAM charges for the entire office building are projected to be $260k, while the gross leasable area (GLA) is 50k sq. ft.
- Annual CAM Charge = $260,000
- Gross Leasable Area (GLA) = 50,000 sq. ft.
After dividing the total annual CAM charges by the gross leasable area (GLA), the CAM charge per square foot is $5.20, which represents the amount that each commercial tenant must contribute based on the amount of square footage leased per year.
- CAM Charge per Square Footage = $260,000 ÷ 50,000 sq. ft. = $5.20
The estimated CAM charge per square footage — $5.20 sq. ft. — must then be allocated in proportion with each tenant’s pro-rata share.
The pro-rata share is determined by dividing the individual tenant’s square footage by the gross leasable area (GLA) of the office building.
Therefore, if one of the commercial tenants leased a total of 6k sq. ft., the pro-rata share is 12%.
- Pro-Rata Share (%) = 6,000 sq. ft. ÷ 50,000 sq. ft. = 12.0%
If the pro-rata share of 12% is multiplied by the annual CAM charge of $260k, the annual contribution by this tenant toward the common area maintenance (CAM) is $31.2k.
- Tenant CAM Charge, Annualized-Basis = 12.0% × $260,000 = $31,200
In conclusion, the final step is to divide the $31.2k in annual CAM fees incurred by the tenant by twelve to arrive at an CAM charge of $2.6k on a per-month basis.
- Tenant CAM Charge, Monthly-Basis = $31,200 ÷ 12 Months = $2.6k
