Common Area Maintenance

Common Area Maintenance (CAM)

Common Area Maintenance (CAM) refers to the operating expenses incurred by a landlord to manage, maintain, and repair the shared spaces of a commercial property. These areas are those that all tenants use or benefit from, rather than the specific square footage leased by an individual business. In the context of commercial mortgages, CAM is a vital metric because it directly influences the property's financial performance and overall valuation.

Detailed Description of CAM

CAM charges are typically passed through from the landlord to the tenants, based on the specific terms of the lease agreement. The goal of CAM is to ensure the property remains safe, functional, and aesthetically pleasing, which helps maintain the asset's market value. Common examples of CAM expenses include:

• Landscaping and Snow Removal: Keeping the exterior grounds and walkways clear and professional.
• Parking Lot Maintenance: Periodic repaving, striping, and repair of lighting fixtures.
• Janitorial Services: Cleaning of shared lobbies, public restrooms, and hallways.
• Security: On-site guards, surveillance systems, and gated access controls.
• Utilities: Electricity, water, and gas used for shared spaces rather than individual tenant units.
• Repairs and Maintenance: Upkeep of elevators, HVAC systems for common areas, and roofing.

CAM and Commercial Mortgages

Lenders scrutinize CAM charges during the underwriting process of a commercial mortgage for several reasons:

1. Impact on Net Operating Income (NOI): Since a property’s value is calculated based on its Net Operating Income, lenders must understand which expenses are "reimbursable" by tenants and which are "non-reimbursable." If CAM expenses are high and cannot be recovered from tenants, the NOI decreases, which reduces the amount of money a lender is willing to provide.

2. Lease Structures: The type of lease—such as a Triple Net (NNN) lease versus a Gross Lease—determines who bears the risk of rising CAM costs. Under a Triple Net lease, the tenant pays for almost all CAM expenses, providing more stability for the landlord’s cash flow, which is viewed favorably by mortgage lenders.

3. Expense Audits and Caps: Commercial mortgage agreements often require the borrower to maintain accurate records of CAM reconciliations. Lenders want to ensure that tenants are not overcharged (which could lead to legal disputes or vacancies) and that the landlord is not under-collecting (which could jeopardize the ability to service the mortgage debt).

4. Maintenance Reserves: If a property has high CAM requirements, a lender may require the borrower to set up escrow accounts or replacement reserves. This ensures that funds are always available for major repairs, preventing the property from falling into disrepair and losing value as collateral for the loan.