Why You’ll Never Win with Common Area Maintenance
CAM responsibility can be a heavy burden on the landlord whereas single-tenant triple net assets give you complete freedom from day-to-day management responsibility.
CAM or “common area maintenance” costs have long been a flash point issue at commercial properties that creates tension between tenants and owners. For tenants, it is an expense that layers on top of the base rent and increases their overall occupancy cost. Meanwhile, landlords get stuck with the day-to-day work of managing CAM and dealing with any pushback from tenants on their CAM charges.
What exactly is CAM?
Tenants that lease space in multi-tenant properties, such as a retail plaza, strip center, or office building, typically pay a base rent for the space they occupy. CAM charges are an added fee that layers on top of that base rent that pertain to shared spaces or services outside of a business’ individual footprint. CAM encompasses costs related to managing and maintaining the overall property, such as parking lots, landscaping, elevators and public restrooms.
Some of the common expenses that fall into the CAM bucket for a variety of commercial properties include:
Parking lot maintenance – repairing cracks, resurfacing, repainting lines
Maintenance and upkeep of key equipment, such as HVAC systems and elevators
Lawncare and landscaping – mowing the grass, tree trimming, planting flowers, etc.
Snow removal may be applicable for properties located in cold-weather states
Cleaning of shared or public spaces, such as lobbies, hallways and restrooms
Utilities for common spaces, such as exterior lighting
How CAM charges work
While the landlord is responsible for the maintenance and upkeep of the property, those everyday operating expenses are passed directly through to tenants in the form of CAM charges. Each tenant pays their pro rata share of CAM costs based on the amount of space they lease. So if the property has a total of 100,000 square feet and you occupy 10,000 square feet, you would be responsible for 10% of the costs to maintain the common areas of the property.
Landlords typically bill tenants for CAM charges on a monthly or quarterly basis based on budged expenses, and then perform an annual CAM reconciliation. The annual CAM reconciliations alone can be a time-consuming and often dreaded task as owners need to sync up budgeted versus actual costs and then bill or credit each tenant accordingly to account for any overages or shortfalls in CAM reconciliation collections. Additionally, landlords have to work with tenants that may dispute charges or exercise their right to audit CAM charges.
Although some landlords charge a small management fee for the work that is included in CAM costs, it is by no means a profit center for owners. The reality is that it ends up being a lot of extra work for a generally thankless job. Many tenants are highly sensitive to the extra costs, and it can be a flash point in landlord-tenant relationships. CAM expenses can and do fluctuate from year-to-year. For example, some routine maintenance, such as new signage or resurfacing a parking lot doesn’t happen every year. When it does, CAM changes jump – and tenants are quick to demand explanations and justifications of the added costs.
NNN assets offer “CAM-free” alternative
Property owners have discovered that one of the added benefits of buying triple net lease (NNN) properties is that they can avoid the many headaches associated with CAM. NNN leases are commonly used in single tenant properties, such as a national bank, drug store, restaurant chain or dollar store. Not only does the tenant pay for all expenses related to the property – rent, property taxes, insurance, utilities and operating and maintenance costs, but the NNN lease also puts all of the responsibility for managing CAM issues squarely on the tenant. Additionally, property owners don’t have to deal with the added work of hiring contractors, negotiating contracts, making sure work is done correctly and on time.
What that structure creates for landlords is a very “hands-off” way to own real estate versus the “hands-on” of actively managing daily operations. Effectively, what that means for NNN landlords is more FREEDOM. Regardless of whether you are on an African safari, a beach in Bali or sitting on your living room sofa watching a ballgame, you don’t have to worry about getting a phone call from a tenant that the roof is leaking or the A/C is broken. NNN tenants deal with those property issues. In fact, many NNN property owners may not even set a foot on site for the full 10-20 years of a tenant’s lease.
Anyone who has ever had to deal with CAM knows that it requires a lot of active management and detailed accounting. In contrast, NNN assets takes CAM completely off the table, all while giving property owners a 100% passive investment opportunity that delivers consistent rental income backed by guaranteed leases from investment credit-rated national retailers. Time is fleeting. Why not enjoy the fruits of your labor and greater freedom allowed with net lease properties?
For more information on net lease investments and whether this sector could be the right fit for your investment and lifestyle goals, please contact Andrew Vu, 415-539-1120, for a complimentary strategy consultation.