A lease agreement contains so many terms, which often tends to confuse people. CAM, which is also called Common Area Maintenance is one such term. CAM refers to the expenses required to maintain the areas shared by the tenants. These charges pay for the cleanliness of parking lots, hallways and pathways, electricity for lighting in common areas, security for the tenants, and the maintenance of other utilities like children's park, swimming pool, and so forth. People occupying flats and large buildings for offices, industries, and medical utilities have a collective bill for water supply, electricity, and remodelling works like repairing and repainting. The CAM charges collected from tenants help pay these bills. Negotiation for CAM is usually done between the landlords and tenants before the lease agreement is signed. While leasing a property, the base rent covers the area leased, whereas the CAM charges cover the common area utilized.
Computing CAM charges:
1) For already existing properties:
The landlords usually determine CAM charges using previously maintained records. These records show how much it had cost for maintenance in the past years. The average amount required for CAM is estimated from this data. The tenants then pay the estimated charge at the beginning of the year. The price may vary depending upon the circumstances. Hence, it is safe for the landlords to charge sufficiently. Chances are there that the landlords may end up in a fiscal-year CAM loss situation which refers to the conditions where the CAM charges decided beforehand in lease agreements may not be adequate for the amount spent after. Subsequently, the landlords wouldn't be able to alter the lease agreements to depict the high cost. Landlords are then supposed to pay for the extra, which may lead to losses. Thus it is significant for the stakeholders to make decisions that safeguard their finances.
2) For new properties:
For newly built commercial properties, estimating CAM charges can be challenging. Without any previous records, determining the price needed for annual maintenance requires more effort.
The landlords can contact any property managing company to receive details for getting to know about the average CAM cost. They can talk with some experienced landlords who may give valuable insights. Creating a list of what needs to be done and measures to take for the property can roughly provide a cost. Negotiating the rates with the people who work for the maintenance and estimating their pay and the amount needed for the supplies used can also help determine the average CAM cost. The landlords, when opting for a variable lease, can have the option to alter the CAM charges if the need arises. Variable leases protect their finances and safeguard them from the fiscal CAM loss.
What amount do tenants pay for CAM?
Generally, the pro-rata share of the property acquired by the tenant is the CAM charge. The Pro-rata share portrays the division of the asset we own to the total asset present. In other words, if the building is 3200 square feet and we rent space around 800 square feet, the CAM is the division of 3200 by 600. Thus we pay 18.75% of the total CAM cost. The pro-rata share varies with property, and other factors influence the CAM charges too. Sudden needs to fix the property on damage, hike in taxes, and many factors also leverage the CAM costs.
Types of Leases
The CAM charges majorly depend upon the type of lease adopted.
These types are,
1. Gross Lease
2. Net Lease
1) Gross lease:
Under a gross lease, there are two types.
● Full-service lease
● Modified Gross lease
In this type of lease, the tenants are supposed to pay a fixed amount to the landlord beforehand. This amount covers everything from the base rent, CAM, insurance, and tax charges. The landlord calculates this operating cost and summons the same from the tenants. The stakeholders negotiate on the operating levy before signing the lease terms. The tenants do not have to worry about the taxes and maintenance works because it is taken care of by the property owner. The amount received may sometimes profit the owner when the expenses get reduced. The landlords may also end up in losses if the expenditures increase. The landlords take care of paying the electricity, water bills, and taxes on time.
Modified Gross Lease:
The lessor and the lessee manage the operating costs under a modified gross lease. Unlike a full-service lease, where every responsibility is handled by the landlord, under the modified lease type, stakeholders equally take part in managing the operating costs.
In certain circumstances, the landlord takes responsibility for the taxes, insurance, and CAM, and the tenant is responsible for the water and electricity bills. These arrangements may vary from lease to lease. The responsibilities of property owners and tenants are thus decided earlier to suit their benefit.
Under a net lease, there are three types.
● Single net lease
● Double net lease
● Triple net lease
Single net lease:
The tenants take care of property taxes by themselves under this type. The asset owners pay the other operating expenses from the rent collected. This type of lease gives some concession on rent.
Double net lease:
The tenants take care of property taxes and the insurance charges under this type of lease. The maintenance cost, water, and electricity bills are paid with the base rent collected from the tenant. Hence, the rent is reduced under this type of lease also. The double net lease is used majorly in commercial real estate.
Triple net lease:
The tenant pays the insurance, property taxes, and CAM charges under the triple net lease. This type of lease provides control to the tenant to some extent. It cuts costs for them and makes it easier for them to track their expenses. The landlord collects a very minimal base rent. Under some circumstances, the cost of all may become hard to bear. Hence, it induces the tenant to withdraw from the lease. So to prevent this, the landlords usually draw a contract stating the lease period so that it may not be possible to cancel the same.
The CAM plays a significant role in the leases. Proper monitoring of the CAM charges in a lease can protect the investment made on the properties. Hence it helps to be aware of what the CAM entails for better decisions in lease management.
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