Fixed CAM Doesn't Always Act Like a "Fix"

Landlords have taken to adopting more and more Fixed CAM lease agreements for several reasons, but with poor data and a less-than-thorough review of the asset and it's true operating costs, both the Tenant and Landlord can possibly suffer.

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Why Would a Landlord Want Fixed CAM?

As I mentioned above, some Landlords have been moving more to Fixed CAM, and they're doing it for several reasons.

1. Fixed CAM is predictable income. Set it and forget it, just like Base Rent.

2. Fixed CAM means no year-end reconciliations. It also means if the estimates were over the actual costs, the Landlord doesn't have to issue credits.

3. No year-end reconciliations means the Landlord's Lease Administration and Property Management staff don't have to go through the reconciliation process, saving work hours and keeping the focus on day-to-day tasks.

Why Would a Tenant Want Fixed CAM?

Fixed CAM is also appealing to a Tenant.

1. Fixed CAM is predictable expense. Set it and forget it, just like Base Rent.

2. Fixed CAM means no year-end reconciliations. It also means if the estimates were under the actual costs, the Tenant doesn't have to pay additional amounts.

What are the disadvantages?

As you may have seen in the above "pro" sections that the #2 reason for each party is really a disadvantage to the other party.

In a year where the Landlord has a large unexpected expenditure (let's pick on snow removal for this discussion), that overage is never recovered by the Tenant because they're paying a set dollar amount. If snow removal, in our example, is part of what was calculated to create the Fixed CAM number, it's not the Tenant's responsibility to pay more.

On the flip side, if the Landlord over-estimated Operating Expenses based on an uncommonly bad repairs and maintenance year where Murphy's Law wore them out, the Fixed CAM number may be way too inflated. That means, the Tenant is paying more than their pro-rata share in each of those years.

Of course, over the life of the lease agreement, it's likely that the over-estimated and under-estimated years will level out, but that's not a guarantee.

Fixed CAM is also usually set with escalations. If you're Fixed CAM is set to escalate 5% each year, it's quite possible that the actual Operating Expenses are only increasing 2-3%. That leaves an extra 2-3% that is being paid by the Tenant over the lease life.

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Conclusion

Fixed CAM leases can be a great benefit to both parties but there's more to it than just setting a number. That amount should be calculated based on previous year trends, expected repairs and maintenance, as well as expected or budgeted capital expenditures over the term of the lease agreement.

Failing to properly come up with the number can cost either side a fair amount of money.

Sound Off!

What's your take on Fixed CAM leases? Have you seen them positively or negatively influence your lease agreements? Let me know your thoughts in the Comments section below.