Common area maintenance fees (CAM) are an important aspect of commercial real estate, especially retail properties. CAM fees are costs associated with maintaining and operating the common areas of a commercial facility, such as a mall or shopping center. These fees are typically passed on by the landlord to the tenant. “Fixed CAM” means that the lease requires the tenant to pay a flat rate (not a tenant's pro rata share) for common area maintenance fees. Fixed CAM fees are typically (i) based on an amount per square foot of the tenant's premises and (ii) subject to increase over the term of the lease.
Benefits of fixed CAM fees for residents
Predictable costs and easier budgeting
One of the key benefits that fixed CAM fees provide to tenants is predictability of operational costs. Traditional CAM fees cause costs to fluctuate throughout the year, making it difficult for tenants to effectively plan and allocate resources. Fixed CAM fees, on the other hand, provide a consistent cost structure, giving tenants better control over their budgets and financial planning. This stability is especially beneficial for small businesses and start-ups, which often have limited resources and require more precise cost control.
More control over expenses
Another benefit of a fixed CAM fee is that it gives tenants more control over their expenses. Traditional CAM fees can result in unexpected, disproportionate expenses, leaving tenants scrambling to cover the costs. With a fixed CAM fee, tenants know exactly what they're paying, allowing them to allocate resources accordingly and avoid unexpected fees. This level of control allows them to use their funds more efficiently and better understand how their CAM fee fits into the overall cost structure of their business.
Increased transparency and fairness in billing
A fixed CAM fee provides a transparent and fair billing process, helping to reduce the potential for disputes between tenants and landlords. With traditional CAM fee arrangements, tenants may feel they are being charged unfairly or that the fee does not reflect the actual cost of maintaining the property. However, a fixed CAM fee is based on a flat rate per square foot, resulting in a clear and easy-to-understand fee structure. This level of transparency fosters better relationships between tenants and landlords, as both parties can easily see how CAM fees are calculated and can trust that they are being billed fairly.
How fixed CAM fees benefit landlords
Easier and more efficient claims process
One of the main benefits that a flat CAM fee provides to landlords is a simplified billing process. Traditional CAM fees are complex and time-consuming to calculate, requiring detailed tracking of expenses and carefully allocating costs based on each tenant's share of the cost. A flat CAM fee allows landlords to streamline the billing process by applying a flat amount per square foot to each tenant's space. This saves landlords valuable time and effort, allowing them to focus on other aspects of property management and tenant relationships.
Reduce administration costs and save time
Implementing a fixed CAM fee can significantly reduce landlords' costs in terms of administrative expenses. Traditional CAM fees often involve a great deal of administrative work, such as collecting expense records, preparing annual reconciliations, and handling fee disputes. By adopting a fixed CAM fee model, landlords can eliminate much of this administrative work, reducing the time and resources required to manage these processes. This improves overall operational efficiency and allows landlords to allocate resources to more strategic initiatives, such as property improvements and marketing activities.
Increased tenant satisfaction and retention
With fixed CAM fees, landlords also benefit from increased tenant satisfaction and retention. Tenants often appreciate the transparency and predictability that fixed CAM fees provide, as they can better understand their financial obligations and plan accordingly. This leads to a more positive landlord-tenant relationship, as tenants feel they are treated fairly and are less likely to become frustrated by unexpected or unclear fees. As a result, satisfied tenants are more likely to renew their leases, resulting in higher retention rates and a more stable tenant base for landlords. Additionally, a reputation for fair and transparent billing practices helps landlords attract new tenants, further improving the overall performance of their properties.
Factors driving the popularity of fixed CAM fees
Pressure on tenants to control costs
The retail industry has become increasingly competitive, with occupiers facing constant pressure to control costs and improve profit margins. This has led to an increased focus on streamlining operations and reducing overhead. Fixed CAM fees provide occupiers with predictable expenses, making it easier for them to budget and effectively manage their finances. This cost predictability is particularly attractive to businesses operating in tough economic environments, as it allows them to more strategically allocate resources and minimize financial risk.
Changing Consumer Behavior and E-Commerce
The rise of e-commerce and changing consumer behavior are having a major impact on the retail industry. As more consumers shift to online shopping, brick-and-mortar retailers must adapt to stay competitive. This includes finding ways to optimize their brick-and-mortar locations and reduce costs. Fixed CAM fees give tenants more control over expenses so they can better adapt to the evolving retail landscape and focus on delivering a great in-store experience that attracts and retains customers.
Sustainability and Energy Efficiency
There is growing awareness in the commercial real estate sector of the need for sustainable, energy-efficient buildings. This has led to an increased demand for efficient property management methods that minimise energy consumption and reduce environmental impact. Fixed CAM fees help encourage more efficient property management by providing a clear, predictable cost structure for maintaining common areas. This allows landlords and tenants to invest in energy-efficient upgrades and technologies that can reduce overall CAM expenses, further promoting sustainable practices in the industry.
Competition among landowners
The commercial real estate market is competitive, and landlords are constantly competing to attract and retain tenants. To differentiate themselves from their competitors, landlords must focus on providing excellent service and building good relationships with their tenants. One way to achieve this is through transparent and fair billing practices, which fixed CAM fees provide. By offering a predictable and easy-to-understand pricing structure for common area maintenance, landlords can improve tenant satisfaction and increase the likelihood of lease renewals. Focusing on tenant satisfaction helps landlords maintain a stable tenant base and improve the overall performance of their properties.
Potential drawbacks of flat CAM fees
Limited flexibility
One potential drawback of fixed CAM rates is that they offer limited flexibility to adapt to changing costs. Unlike traditional CAM rates, which can be adjusted based on actual costs, fixed CAM rates are determined in advance and may not accurately reflect the current costs of maintaining common areas. This lack of responsiveness can limit landlords' ability to adapt their property management strategies to changing circumstances, such as fluctuating utility costs, unexpected repairs, or the introduction of new regulations that impact maintenance practices.
Risk of overcharging
Another potential problem with fixed CAM fees is the risk of tenants being overcharged if costs are not accurately predicted or controlled. In some cases, fixed CAM fees can be set too high, resulting in tenants paying more than is fair value for maintenance costs. This can lead to resentment and disputes between tenants and landlords, and even legal action if tenants feel they are being unfairly charged.
Resentment and lack of trust
If the working relationship between landlord and tenant is already poor, the introduction of a fixed CAM may be perceived as unfair or unreasonable. This negative perception of a fixed CAM may lead to increased resentment and a lack of trust between tenants and landlords. If tenants feel they are being overcharged or that the CAM fees do not accurately reflect the actual costs of maintaining the property, they may be less cooperative and more likely to seek alternative lease arrangements. This may further strain the landlord-tenant relationship and ultimately make it more difficult for landlords to retain tenants and maintain a stable tenant base.
Negative impact on property values
An inaccurate fixed CAM fee can negatively impact the value of a property if a landlord is unable to recoup the full cost of maintaining common areas. Underestimating costs and setting a fixed CAM fee too low can create a shortfall and force the landlord to foot the difference. This can negatively impact the property's cash flow and ultimately reduce the property's value in the eyes of potential investors. To avoid this issue, landlords should carefully analyze historical cost data and market trends to set an appropriate fixed CAM fee that accurately reflects the actual cost of maintaining the property.
Fixed CAM fees offer several benefits to both tenants and landlords, including greater predictability and transparency in billing, reduced administrative costs, and increased tenant satisfaction. However, they also have potential drawbacks, including limited flexibility and the risk of overbilling. As the retail real estate industry continues to evolve, fixed CAM fees are likely to play an increasingly important role in the future, but landlords and tenants should carefully consider the potential benefits and drawbacks before adopting this approach.
Marc Altieri > Vice President, Leasing and Investments
Marc Altieri joined SimonCRE in 2021 as Vice President of Leasing and Investments, where he is responsible for communicating with tenants throughout the development process, coordinating with brokers and buyers, and ensuring timely and accurate transactions through comprehensive due diligence.
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