Understanding Commercial Rental Fees
July 18, 2022
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What Are Commercial Rental Fees?
Overseeing a commercial rental property can be a complex process.
There are many moving parts and responsibilities that come with it.
Understanding commercial rental fees and how to charge tenants is a key part of the process.
Common area maintenance (CAM) charges are the major fees associated with operating commercial property. These are often passed on to tenants.
Understanding CAM charges and how to implement them is a critical facet of operating commercial property.
Types of Commercial Leases
Before we dive into the charges, let’s look at the major types of commercial leases. It’s important to understand these to know what kinds of charges you may want to include and how you may want to include them.
Triple Net Lease (NNN Lease): When it comes to a NNN lease, most of the onus falls on the tenant. The tenant pays their pro rata share of the property taxes, property insurance, and common area maintenance. You, as the landlord, will still be responsible for capital expenditures, though. This refers to improvements or repairs made to the building, land, or parking lot.
Negotiations on lease terms can change some of these details. For example, often the tenant is only responsible for HVAC repairs before a specific dollar amount. It’s similar to an insurance deductible in this way.
Most retail properties have triple net leases, including restaurants, shopping malls, and single-tenant properties. The stability of the net cash flow is a significant reason investors prefer these properties.
Because of their ubiquity, triple net leases are often referred to as net leases. This can create confusion, so it’s meaningful for everyone involved with an agreement to comprehend the lease terms clearly.
Net Net Lease (NN Lease): This lease structure is less common than the NNN lease. It involves tenants paying their share of insurance and property taxes, while you cover common area maintenance.
This kind of lease lowers risk for tenants. It also typically means higher rent because a landlord has more they’re responsible for.
Net Lease: This is one of the least common kinds of leases. With this type of lease, the tenant pays their share of the property taxes, while the landlord takes care of the cost of insurance and common area maintenance.
Gross Lease: This kind of lease covers the costs of property taxes, insurance, and common area maintenance costs. This is the most typical type of lease for office buildings.
CAM charges can be related to any cost of managing and maintaining the commercial property. Unfortunately, there’s no universal definition of what CAM charges entail. What CAM fees consist of can vary from one area to another, even from one landlord to another.
Adding CAM charges benefits you because it allows you to get reimbursed for certain costs related to owning and managing a commercial property. This protects you from cost increases and keeps your return on investment from being significantly impacted.
For tenants, CAM charges can be a bit confusing. While the landlord gets protection from fluctuating costs, the tenant may end up paying more with rising expenses.
It’s not all burdensome for tenants, though. CAM charges can benefit tenants. Why? Some landlords will delay certain repairs if they have to handle the cost themselves. Passing these costs on to the tenants often means landlords are more likely to keep up with maintenance. This ensures the tenant will have an up-to-date, well-maintained property.
Included in CAM Charges
So, what is usually included in CAM charges? Let’s take a look below:
Elements of CAM Charges
- Landscaping. Routine lawn care and landscaping costs include mowing grass, weed removal, fertilizing, maintaining the irrigation system, maintaining shrubs and trees, replacing mulch, and planting flowers.
- Parking Lot Upkeep. Parking lot upkeep may involve repairing fissures, resurfacing, repainting lines, and maintaining lot lights.
- Snow Removal. Snow removal depends on the area. Thus, the cost will fluctuate based on the amount of snow your site usually gets.
- Sidewalks. Sidewalk upkeep is important for everyone’s safety. Nice sidewalks make it easy to get into the building.
- Halls and Bathrooms. Most commercial properties have shared bathrooms that need to be stocked with supplies and kept clean. Similarly, hallways are always a part of these properties and must be well-lit and presentable.
- Elevators. Multi-level buildings will probably have elevators that need consistent upkeep.
- Utilities. A staple of every rental anywhere. Electricity and gas will be needed to keep everything on and functioning in the building.
There are additional operating expenses that may factor in as well. Every property has unique things about it, and yours probably won’t be an exception. Below are some additional CAM items that are often included in leases:
- Administrative expenses
- City permits
- Property taxes
Calculating CAM Charges
There are a few typical ways that landlords charge CAM costs to tenants. Some are fairly simple, and others require more complex accounting. You should do what makes the most sense for you and your business.
Pro Rata Share of Square Footage: This is the way most landlords calculate CAM charges, according to the National Association of Realtors. This calculation involves the square footage that the tenant is renting divided by square footage for the total defined area of the building, then multiplied by 100.
It’s important to note that if the total defined area of the building isn’t detailed in the lease, then one of two amounts is typically used: Gross Leasable Area (GLA) or Gross Lease Occupied Area (GLOA). GLA is the total amount of space in the building that is available for leasing, whether it’s occupied or not. GLOA reflects the total occupied area of a building. GLA is better for tenants because it takes the entire building into account, which reduces the tenant’s responsibility.
Fixed CAM Charges: This way of calculating charges simplifies everything. As a landlord, you decide on a flat fee for common area maintenance and then add small annual increases to that fee to account for inflation.
Fixed CAM charges can either apply to property taxes, maintenance costs, and insurance or apply specifically to maintenance costs and leave property taxes and insurance separate.
Load Factor: Load factor is the percentage of space being rented that is not usable and is found using the simple formula of rentable area divided by useable area. For example, if a tenant is paying rent for a space with 5,000 rentable square feet, but it only has 4,500 square feet of usable space, then about 11% of that is a load factor.
These are some of the major ways landlords calculate CAM charges. There are, of course, other options. But it’s important to understand these methods, so that you are working from a useful foundation.
With everything that’s been said, it’s critical to understand that final terms are ultimately up to the landlord and the tenant. If the terms are legal, then landlords and tenants can create unique rules and calculations that work best for them.
It’s helpful to understand the typical terminology and calculations, though, to have a baseline. Now, you can work with what you know to determine the best route.