A Tenant's Guide To Understanding CAM Charges

This is part 1 of a 3-part series on CAM (Common Area Maintenance) charges. Part 1 explains what CAM charges are, why they’re important to understand, and how they are calculated. February’s newsletter will zero in on the first two of “4 Steps To Understanding Your CAM Obligations.” In March we’ll present Steps 3 and 4.

You’re a franchisee who has just signed a lease for the absolute best real estate transaction in town: the agreed-upon rents are amazing, along with the additional charges for marketing, real estate taxes, and insurance. The total amount is in line with your budget, so that after your first year in business, you’re forecasting enough increase in your net operating income that you will be able to take that long-awaited vacation to Tahiti! Oh, and there’s that CAM charge that you don’t completely understand but that seems reasonable.

Without a well-negotiated, clearly written CAM clause, you are taking a significant financial risk. This could involve potentially being obligated to pay unexpectedly higher CAM charges to the landlord, as well as endure continual ongoing increases of those charges during your entire lease term.

We’re here to help. This series, along with a downloadable guide to CAM charges (see link below) has been written to help you understand CAM charges so you can be sure you’re paying only your fair share.

What are CAM charges?

Common Area Maintenance (CAM) charges are costs that landlords incur for the management, maintenance, and repair of common areas at a shopping center. These can include parking lots, lobbies, hallways, landscaping, security, and other shared spaces that benefit all tenants. CAM charges also can be referred to as “operating expenses,” and are sometimes passed through to the various tenants at a shopping center.

While they may sound simple, this is one of the most misunderstood clauses in a retail lease. And, if vague or poorly written, a CAM clause can have major negative unforeseen monetary implications for a retail tenant’s net operating income.

How are CAM charges calculated?

CAM charges and the pro rata share for each tenant are typically calculated using a formula specified in the lease agreement. The specific calculation method can vary from lease to lease, but here’s a common way in which CAM charges and pro rata shares are determined.

1. Total CAM expenses: The landlord calculates the total annual expenses associated with maintaining and operating the common areas of the property. These expenses can include items such as landscaping, cleaning, utilities, property management fees, security, repairs, and other common area costs. The expenses are usually tracked over a fiscal year.

2. Pro rata share: To determine each tenant’s pro rata share of the CAM expenses, the landlord uses the following formula:

Pro Rata Share = (Tenant’s Leasable Area) / (Total Leasable Area in the Property)

Tenant’s Leasable Area: The square footage or measurement of the tenant’s leased space within the property.

Total Leasable Area in the Property: The sum of all leasable areas in the entire property.

3. Estimated CAM charges: With the pro rata share calculated for each tenant, the landlord then estimates the annual CAM charges for each tenant. This is done by multiplying the tenant’s pro rata share by the total CAM expenses for the year.

Estimated CAM Charges = (Pro Rata Share) x (Total CAM Expenses)

4. Payment schedule: Depending on the terms of the lease, tenants may be required to pay their estimated CAM charges on a monthly or quarterly basis in addition to their base rent. These payments are typically referred to as “CAM estimates.”

5. CAM reconciliation: At the end of the fiscal year (or another specified reconciliation period), the landlord reconciles the actual CAM expenses incurred during that period against the total of the CAM estimates paid by each tenant.

6. Year-end adjustment: If a tenant has overpaid their estimated CAM charges, they may receive a refund or credit toward future CAM charges. If they have underpaid, they may receive an adjustment bill for the additional amount owed.

Get the guide

To empower tenants with the knowledge needed to navigate CAM charges effectively, our team of real estate experts has created an in-depth guide you can download to help you in this process. Download the complete guide here.

Next month: 4 Steps To Understanding Your CAM Obligations. Step 1: Clearly define what’s excluded from CAM costs, and Step 2: Understand how CAM costs are calculated. And in March, Step 3: Negotiate a cap on the annual increases of CAM charges, and Step 4: Always insist on audit rights.

Taj Adhav is the founder of Leasecake, a lease and location management platform built for multi-unit operators. Leasecake was built to help franchisees and franchisors focus on what matters when it matters, saving time, minimizing risk, and better managing growth through easy-to-use, flexible software. Contact him at taj@leasecake.com.