It’s Not a SCAM

By Karen Johnson

Common charges, operating expenses, pass throughs,

additional rent — all of these terms refer to the same thing, Common Area

Maintenance (CAM). CAM is frequently misunderstood by tenants, particularly if

they are not represented by an experienced broker. CAM charges include both

controllable and uncontrollable expenses incurred by the landlord and passed on

to the tenant to pay for various services needed for building upkeep. Contrary

to what many believe, owners make no profit from CAM. In fact, owners must pay

for CAM expenses regardless of the vacancy rate of the building. In other

words, if a building is only 10 percent leased, the tenant pays 10 percent of

the CAM and the owner pays 90 percent.

Uncontrollable CAM charges include real estate taxes,

insurance and common area utilities such as electric and water. Controllable

CAM expenses include everything from elevator maintenance and landscaping to

parking lot sweeping and window cleaning. As expected, rates vary for every

building. For instance, a class A building may have a rate of $7 per square

foot while a class C building may have a rate of $2 to $3 per square foot.

What is a Fair CAM Rate?

This drastic variance causes tremendous confusion. It all

boils down to the efficiency of the property management company that sets the

CAM. Although uncontrollable costs are non-negotiable, an experienced property

manager can not only accurately estimate the following year’s real estate

taxes, but he or she also will actively appeal certain real estate tax

increases. In addition, all controllable expenses are put up for bid frequently

— yearly in the best case scenario. This keeps vendor prices at the lowest rate

possible which thereby keeps the CAM rate in check.

When considering a lease, tenants are either presented with

a gross figure, which includes CAM, or a triple net lease which shows base

rent, plus tenant utilities, plus CAM rates. A reasonable CAM rate in Southwest

Florida for a class A building usually runs around $6 to $7 per square foot. A

class B or C building is typically less at about $3 or $4 per square foot. When

determining if the rate is fair, the tenant should consider the benefits for which

they are paying.

Higher CAM, Better Service?

Does the landscaping of the building look freshly trimmed?

Are common areas clean? Is the parking area well-lit and free of debris? Are

windows clean? Does the building have a door attendant? Are elevators in

working order? The answers to these questions should be reflective of the CAM

rates. If first-class service, maintenance and appearance are desired by the

tenant, higher CAM rates should be expected. However, if poor maintenance is

evident and CAM rates are high, chances are the property management company is

not doing an effective job.

An experienced leasing agent will look for telltale signs

when presenting a leasing opportunity to a client. Does the building look run

down? Is the parking lot cracked? Do awnings sag? Are windows cracked or

cloudy? Since it is more expensive to fix problems than provide consistent

upkeep, rates will be lower in a building that is being properly maintained.

Good Property Management is Critical

A leasing agent’s job becomes much harder when CAM rates are

high. However, with good property management, a higher CAM rate is easier to

sell if the rate reflects high quality services. A reputable property

management company keeps scrupulous records, provides accurate budgets, hires

quality subcontractors and keeps vigilant watch over their buildings.

If tenants have any concerns over incurred expenses, they

should ensure their lease affords the right to audit books and review the

reconciliation at the end of the year. From this audit, tenants can decide if

their CAM is fair and if property management is doing an effective job. In

addition, tenants may want to review Florida statutes to confirm that sales tax

is required on CAM. The issue of sales tax being required by Florida State law

is difficult for tenants, owners and leasing agents to accept, since a large

part of CAM expenses are real estate taxes. In essence, the state is taxing a

tax. However, regardless of how vexing it may be, it is the law.

But What if Rates Are Wrong?

Since CAM rates are set largely as a function of anticipated

real estate tax rates, estimating by property management must be on target. But

even in the best scenario, rates could be off at the end of the year. This

could happen for a number of reasons, such as higher or lower tax increases

than anticipated, natural disasters or unexpected utility rate increases. What

happens if the CAM was set too low or too high?

If the CAM is set too high, the tenant will get a refund

check from the landlord at the end of the year. If the CAM is set too low,

however, the tenant will get a bill for the balance. As you can see, neither

situation is desirable. Accurate estimating by property management minimizes

the chance of over or under billing, which is much more palatable for both the

landlord and the tenant.

CAM is here to stay, so make sure you are getting what you

are paying for. Make sure your property management company is efficient and

professional and able to ensure that CAM rates reflect the level of service

with which you are comfortable.

Karen Johnson is a Commercial Real Estate Advisor with Grubb

& Ellis|VIP-D’Alessandro.