Introduction

The two most common recovery structures in commercial real estate are Triple Net Lease (NNN) and Gross. The difference between the two is based on who pays the common area maintenance (CAM) charges.

In a Triple Net Lease, the tenant is responsible for paying their share of CAM charges while in a Gross Lease the property owner is responsible for the CAM charges. Within the NNN Lease, different CAM pricing structures exist that provide a unique set of pros and cons to the tenant and property owner. In general, CAM charges can be characterized into fixed or variable expenses.

CAM Charge Examples & Proration

CAM charges can include a multitude of property operating expenses. What constitutes a CAM charge is dependent on the lease agreement which is set by the property owner. Some examples of CAM charges include janitorial services, management fees, taxes, HVAC maintenance, common area utilities, etc.

Pro-rata allocation is the proportionate distribution of any item, in this case CAM charges. To calculate a tenant’s pro-rata share of CAM charges, the property owner will take a tenant’s square footage and divide it by the property’s gross square footage. The result is a ratio that represents a tenant’s portion of CAM charges. This ratio is then multiplied by a properties total CAM charges resulting in a tenant’s dollar amount of CAM charge.

CAM Structures

The way CAM charges are allocated can be broadly categorized into fixed and variable structures. Under a fixed CAM structure, the property owner will set a fixed CAM charge (usually on the higher end) to charge the tenant. In this case, the tenant will pay a premium on CAM charges in exchange for increased certainty. On the other hand, variable CAM charges are subject to change over the course of the year. Variable CAM charges are based a multitude of factors and often require a year-end reconciliation to ensure both parties are charged accurately.

CAM Stops

In-between NNN and Gross structures are stop amounts. A stop amount is a specific dollar amount of CAM charges that a tenant will not be responsible for. Any CAM charges that exceed the stop amount will then be allocated to the tenant pro-rata. Below is a list of the different stop structures.

Base Year Stop: All reimbursable CAM charges are paid by the tenant based on their pro-rata share of the property SF over a stop amount, i.e. actual amount annual reimbursable CAM charges in base year of lease (1st year of lease).

Base Year Stop -1: All reimbursable CAM charges are paid by the tenant based on their pro-rata share of the property SF over a stop amount, i.e. actual amount annual reimbursable CAM charges in year prior to base year (1st year of lease).

Base Year Stop +1: All reimbursable CAM charges are paid by the tenant based on their pro-rata share of the property SF over a stop amount, i.e. actual amount annual reimbursable CAM charges in year after base year (1st year of lease).

Inflation Cap: Limits the percentage CAM charges can increase annually.  For example, if you negotiate a 3% inflation cap, then CAM charges cannot increase by more than 3% of the prior year’s CAM charges.

Conclusion

Understanding CAM charges is a key component of making sound financial decisions for both tenant and property owner. This paper outlines some common structures and CAM charges, but many variables differ across leases. Each lease will dictate what is included as a CAM charge, how often they are paid, and pricing structure. By understanding the lease agreement, tenants can better predict their monthly expenses and gage the level of expense volatility they are exposed to.

Before founding 3E in 2016, Managing Member Eric Bergin was Director at Rockpoint Group, where he was responsible for for the Finance Group, as well as acquisitions, asset management, and investor reporting activities.