CAM & Utilities

Definition of CAM & Utilities

In the context of commercial mortgages and real estate leasing, CAM (Common Area Maintenance) and Utilities represent the operational expenses associated with running a commercial property. These costs are a critical component of a property’s financial profile because they directly impact the Net Operating Income (NOI), which is the primary metric lenders use to determine how much debt a property can support.

Detailed Description of CAM

Common Area Maintenance (CAM) refers to the fees paid by tenants to the landlord to cover the costs of maintaining the shared spaces of a building or complex. In a commercial mortgage underwriting process, the lender analyzes how much of these costs are recovered from tenants versus how much the landlord must pay out of pocket.

CAM charges typically include expenses for:

• Landscaping and Snow Removal: Keeping the exterior grounds and parking lots safe and aesthetically pleasing.
• Janitorial Services: Cleaning of lobbies, shared hallways, and public restrooms.
• Security: On-site security guards, gate maintenance, and surveillance system monitoring.
• Repairs and Maintenance: Routine fixes to the roof, HVAC systems (in shared areas), and parking lot striping.
• Administrative Fees: The cost of property management personnel who oversee the daily operations.

Lenders pay close attention to "slippage," which occurs when the actual CAM expenses exceed the amount the landlord is able to recover from tenants due to caps or poorly negotiated lease terms.

Utilities in Commercial Real Estate

Utilities encompass the basic services required to keep a property functional, including electricity, natural gas, water, sewer, and waste management. In commercial mortgages, the way utilities are metered and billed is a significant factor in risk assessment.

There are three primary ways utilities are handled:

• Direct Metering: The tenant has their own account with the utility company. This is the preferred structure for lenders because it removes the risk of fluctuating energy costs from the landlord.
• Sub-metering: The landlord pays the master bill but bills tenants based on individual meters installed for their specific suites.
• RUBS (Ratio Utility Billing System): When individual meters aren't available, costs are allocated to tenants based on square footage or occupancy.

Impact on Commercial Mortgage Underwriting

The relationship between CAM, Utilities, and the mortgage lies in the Lease Structure. Lenders categorize properties based on who bears the burden of these costs:

Triple Net (NNN) Leases: In these agreements, the tenant pays for almost all CAM and utility costs. This provides the lender with the most security, as the landlord’s income is insulated from rising inflation or utility price hikes.

Gross Leases: The landlord pays all CAM and utilities out of the base rent. Lenders view these as higher risk because if utility costs spike (e.g., a cold winter increasing heating bills), the Debt Service Coverage Ratio (DSCR) could drop, making it harder for the borrower to make mortgage payments.

Reimbursement Revenue: On a property's Profit and Loss statement, the money tenants pay back for CAM and Utilities is listed as "reimbursement income." A healthy commercial mortgage candidate will show a high percentage of expense recovery, indicating that the property's cash flow is stable and well-managed.