What is CAM and is it negotiable?

Common Area Maintenance (“CAM”) Expenses (also known as “Operating Expenses”):An Operating Expense or CAM provision requires the tenant to pay its pro rata share of the operating expenses incurred by the landlord in the operation and maintenance of the building or shopping center. CAM is commonly expressed as a cost per square foot, and is calculated on a pro rata basis. The provision should only pass through to the tenant legitimate expenses relating to the operation and maintenance of the common areas. This usually covers non-capital items such as parking lot repairs, exterior repairs and cleaning, shared interior repairs and cleaning, increases to landlord’s insurance cost that exceed the Base Years’ insurance and property management fees.

  • Before signing a lease, it is recommended tenants estimate their costs associated with CAM and ask for the history of the building’s CAM charges for at least the two prior years. This will enable tenants to compare the amount of operating expenses and their annual increases to other comparable buildings to determine whether they are reasonable, and to estimate what the charges might be in future years.
  • Attention must be given to the definition of the base year in any CAM clause which requires the tenant to pay its prorata share of expenses incurred over a base year. Some tenants can negotiate to ensure they do not pay for expenses during the base year and that the base year variable expenses are subject to a “gross up” to reflect the full amount of operating expenses that would have been incurred by the building had it been 100% occupied.
  • There should never never be any provision making the landlord’s determination of CAM charges final unless the tenant can reserve the right to audit the landlord’s expenses and to review the landlord’s calculations.
  • A tenant friendly lease commonly reserved for well established tenants may include a cap on the CAM amount, or on specific items included in the CAM amount (i.e. Management expenses shall not exceed 5% of total Common Area Maintenance cost.)

An example of a CAM Lease clause follows

 COMMON AREA MAINTENANCE EXPENSES (CAM):

Common Area Maintenance (CAM) shall include but not be limited to maintenance, repair, replacement and care of all lighting, plumbing, roofs, parking surfaces, landscaped areas, signs, snow removal, non-structural repair and maintenance of the exterior of the Building, costs of equipment purchased and used for such purposes, cleaning and cleaning supplies for the common areas, insurance premiums for insurance required by this Lease, management fee up to five percent (5%) of gross collected rents, and wages and fringe benefits of personnel up to the level of property manager or equivalent employed for such work. Additionally, during the Term of this Lease, any extension and/or renewal of this Lease, CAM expenses shall include the annual cost or portion allocable to the Building of any capital improvements made to the Building by Landlord which result in a reduction of expenses or required under any governmental law or regulation that was not applicable at the time it was constructed. Landlord shall amortize such costs over the useful life and at a reasonable rate of interest.

Notwithstanding the foregoing, CAM shall exclude the following:

(i) interest, amortization or other costs, including legal fees, associated with any mortgage, loan or refinancing of all or any part of the Building or sale of all or any part of the Building;
(ii) amounts reimbursable from insurance proceeds, under warranty or by Tenant, any other tenant in the Building or any other third party other than pursuant to a CAM expense provision similar to this Section;
(iii) interest, late charges or penalties incurred as a result of Landlord’s failure to pay bills in a timely manner (unless such failure is directly related to the failure of Tenant to pay Tenant’s Share of any such bill in a timely manner);
(iv) leasing or brokerage fees;
(v) depreciation;
(vi) costs incurred in connection with the transfer or disposition of all or a portion of Landlord’s interest in the Building;
(vii) costs of providing to other tenants services which are not available to Tenant;
(viii) attorneys’ fees and other legal costs incurred as a result of defaults by, or litigation or other disputes with, other tenants of the Building;
(ix) the portion of CAM which relate to more than one building or project to the extent that cost should be allocated to a building or project which is not occupied by Tenant, including, for example, employee costs, office costs, parking lot maintenance and repairs.
(x) expenses for the preparation of space or other work which Landlord performs for any tenant or prospective tenant of the Building;
(xi) accounting and legal fees relating to the ownership, construction, leasing or sale of the Building; and accounting and legal fees paid or imputed to full time employees of Landlord or any management agent;
(xii) any amount paid to an entity or individual related to Landlord which exceeds the amount which would be paid for similar goods or services on an arms-length basis between unrelated parties;
(xiii) the cost of correcting defects in the construction of the Building;
(xiv) management fees to the extent they exceed five percent (5%) of the gross receipts from the Building;
(xv) any ground rent, air space rent or other rent incurred for the Building;
(xvi) the cost of correcting any applicable building or fire code violation(s) or violation(s) of any other applicable law relating to the Building in effect on the Commencement Date;
(xvii) any costs (including any damages or future claims asserted against Landlord in connection with the same) incurred to test, survey, cleanup, contain, abate, remove or otherwise remedy Regulated Substances from the Building which were present at the Building prior to the Commencement Date or brought onto the Building after the Commencement Date by a party other than Tenant or by those for whom Tenant is responsible for under this Lease;
(xviii) any personal property taxes of Landlord for equipment or items not used directly in the operation or maintenance of the Building;
(xix) all overhead expenditures pertaining to the administration of the Building, except to the extent expressly authorized under this Lease;
(xx) rentals and other related expenses, if any, incurred in leasing items to the extent that the cost of the purchase of that item would not be included as a permitted capital expenditure hereunder;
(xxi) contributions to CAM reserves if such reserves will not be used during the calendar year in which such reserve is created;
(xxii) all bad debt loss, rent loss or reserve for bad debt or rent loss; and
(xxiii) any and all costs of Landlord’s office and office operation for the Project for office space in excess of 500 square feet of rentable area, and all supplies and materials used in connection therewith.

Click HERE for  a “Top 10” list created by Cox Castle Nicholson identifying some of the key points related to Common Area and CAM Expense provisions in retail leasing.