CAMs from a commercial property manager perspective

[Jonathan Orr]

Hi BP I wanted to get your opinion on what is included in Common Area Maintenance fees (CAMs). I know that most if not all fees for the maintenance and care of the property are included. However one thing I am wondering is if you have a tenant (I am speaking from the commercial side of real estate) and have a NNN lease. In your CAMs charges, do you include the fee for a management company or manager? I am looking at developing a few industrial properties and want to be able to base my underwriting correctly if I should include the property management fee in the CAMs once the property is up an running.  Looking to pick the brain of any commercial property managers or management companies. Thank you!

[Joel Owens]

In response to a gross lease it is not the same as a NNN. If building is brand new then close but having gross leases on older buildings can eat a property owner alive. The owner is paying for all of that with a gross lease. New building hardly any expenses so you might net more than NNN but older building it usually swings the other way.

You can try to convert gross to NNN but most tenants would fight on that especially with an older building.

Whether tenants are required to pay for all expenses or not trying to charge them for roof,parking lot,etc. all at once is rarely possible with mom and pop to regional tenants. Instead what usually happens is the owner pays for it upfront and then collects what they can over time until paid off.

That is if as already mentioned an owner did not already account for it with so much reserves per sq ft while owning to properly maintain the asset to a high standard.

When buying a retail center the first question I ask is about roof and parking lot because they tend to be the most expensive costs. For the roof you get core samples as some owners just like to throw another layer on top but the substructure is falling apart and the whole roof needs replacing. Also I have seen where the seller put on too many layers on the commercial roof and insurance companies would not write a policy because of it.

We ask sellers for a credit at closing in reserve to pay for the cost of replacements for HVAC,roof,parking lot etc. You have to make sure lender will not try to reduce proceeds to the loan amount instead of you having the credit for replacements.

The reducing the loan amount might be saving you 20 bucks a month so means nothing versus the 50k credit from the seller.

Most mom and pop tenants live hand to mouth and if you shock them with a big expense that raises overall cam above base rent by a few dollars a foot it can send them into a tailspin. Even if they can handle it they might start looking for another place to rent at a cheaper cost. Even though NNN has tenants paying CAM the owner has to try to keep overall cam as low as possible so that the businesses can more easily pay annual rental increases and thrive.