“How To Establish Base Rent And CAMS For A Commercial Real Estate Lease”

Wondering about the right amount of rent to charge your tenants?

The profitability of rental properties is based on the rent payment from tenants. The rent is the fuel you need to keep your rental business running.

Setting the right amount of rent can not only make your business more profitable, but can also attract more possible tenants.  Knowing how to set the rent is an essential skill.  

However, many property managers struggle with setting their rents.  

That’s why in today’s article, we’ll talk about setting the base rent, and the CAM expenses, in a commercial real estate lease.

Understanding The Base Rent And CAM Expenses In A Commercial Real Estate Lease

The commercial property manager’s primary responsibility is to make the commercial rental property business successful.

The key to a successful property management business is profitability. To be profitable, and to make all of your commercial properties profitable, you need to have knowledge of all the expenses and requirements each property carries. Having minimal knowledge about managing any of your commercial properties may prevent you in achieving success.

The best way to manage your property effectively, while making a profit for your business, is understanding how the base rent and CAM expenses (Common Area Maintenance) impact or effect your expenses.  This will help you in understanding what you need in rents and payments to achieve having healthy revenue for your property management business.

What Is Rent In A Commercial Real Estate Lease

A rent is an amount paid by tenants to occupy or to temporarily owning a unit or space measured by its total square feet. The rental space is commonly determined as the cost per square foot paid by tenants in your commercial rental buildings or properties.

Commercial rents are normally calculated and negotiated on a year to year basis in most markets.

Here’s how the tenant’s rent, is calculated…

  • Rent per square foot is valued at market rates or higher depending on demand for commercial space.
  • The rent per square foot is multiplied by the number of square feet that the tenant occupies determining monthly rent cost.
  • Any CAM (Common Area Maintenance) costs are factored and added into the buildings rental costs.
  • The rent cost per square foot added to CAM is then multiplied by 12 months to determine a yearly cost for rent.
  • The total result will be the annual amount of the tenant’s rent.

Normally commercial rents are negotiated on a yearly basis but commonly most tenants and property managers agree to pay the rent monthly instead of annually…

2 Components Of Commercial Real Estate Rent

The rent in commercial real estate lease usually has two components: base rent and additional operating expense or CAM to the final rental cost.

As a property manager its important to know what these components stand for and how it will affect the amount of rent for your commercial real estate.

Take a look at the definitions of a base rent and additional CAM or operating expenses to determine the final rent to be paid by tenants.

1. Base Rent

The base rent serves as a proxy for Net Operating Income (NOI). The NOI is commonly called as the Total Rental Revenue minus Reimbursable Expenses and Non-Reimbursable Expenses.

The Non-Reimbursable Expenses are the expenses for owning the property. But the expenses used for the daily operation of the property are not included in the Non-Reimbursable Expenses.

The base rent is usually calculated based on the actual square foot that a tenant is renting. Regardless of the total amount of space, the base rent is always negotiable but it increases…

  • Annually
  • Monthly
  • Per square foot per year
  • Per square foot per month.

Here are the most common ways why the base rent is increasing:

  • Pursuant to stated amounts for stated time periods in the lease
  • Based on a formula (i.e. 3% annual rent steps)
  • By an index (i.e. CPI or Porter’s wage).

2. CAM Expenses

The CAM Expenses stands for Common Area Maintenance Expenses. It’s also known as the Operating Expense Rent.

Your commercial property’s CAM Expenses are the expenses that are used for the daily operation of the property. In keeping the common areas clean and up to date gives benefit to all of the tenants in your commercial property.

The CAM Expenses are commonly used for the following:

  • Janitorial services
  • Janitorial supplies
  • Trash removal
  • HVAC and elevator maintenance
  • Landscaping
  • Pest control
  • Snow removal
  • Building supplies
  • Building maintenance labor
  • On-site management staff
  • Property accounting and management
  • Security services
  • Fire alarm monitoring
  • Electricity
  • Natural gas and water/sewer utilities
  • Insurance
  • Real estate taxes

You should always remember that your CAM expenses should not cover the following:

  • Costs associated with income tax filing
  • Personal owner items
  • Owner distributions
  • Non-capitalized leasing and marketing expenses
  • Costs of collection from non-paying tenants

And CAM expenses should not include capitalized expenses such as:

  • Tenant finish improvements
  • Leasing commissions
  • Other improvements that add value to the asset such as creating additional parking or putting on a new roof

Going Into Detail About CAM Expenses

Studying and understanding all of the CAM expenses your property generates allows you to explain to your tenants why your rent amounts to what you are offering.

When determining your CAM costs and expenses there are three things you should know about your CAM expenses.

Determining The Amount Of Tenants’ CAM Expenses

If your commercial property is rented by different individuals it is reasonable to require each tenant to shoulder part of the CAM expenses of your property. The cost of the CAM expenses can be added to your tenant’s base rent and this allows you to require each of your tenants to pay a percentage of your property’s operational expenses.

The total amount of the anticipated CAM expenses are best determined on a yearly basis. That cost is then multiplied by each pro rata share or square foot of the total property tenants occupy, then divided by twelve months to arrive at the monthly amount of CAM rent.

Remember to always prepare an annual building operating budget as well as an estimate of the CAM expenses for the following year to avoid not negotiating enough rent to cover these expenses.

A Breakdown Of CAM Expenses

Your CAM expenses should cover anything that is related to the operation, repair, and maintenance to keep the property in neat, clean, or good condition.

What CAM Expenses Do Not Cover

Your CAM expenses should not cover:

  • Parking areas, loading and unloading areas, trash areas, roadways, parkways, walkways, driveways, landscaped areas, bumpers, irrigation areas, common area lighting facilities, fences and gates, elevators, roofs, exterior walls of the building, building systems and roof drainage systems.
  • Exterior signs and any tenant directories, any fire sprinkler systems and all other areas and improvements that are within the exterior boundaries of the project but outside of the premises and/or any other space that is occupied by the tenant.
  • The cost of water, gas, electricity, and telephone to service the Common Areas and any utilities not separately metered.
  • The cost of trash disposal, pest control services, property management, security services, owner’s association dues and fees, the cost to repaint the exterior of any structures and the cost of any environmental inspections.
  • Reserves set aside for maintenance and repair of Common Areas and Common Area equipment.
  • Base Year property taxes.
  • Insurance cost.
  • Any deductible portion of an insured loss concerning the Building or Common Areas.
  • Auditors, accountants and attorney fees and costs related to the operation, maintenance, and repair of the property.
  • Cost related to the operation of the Project that’s in your lease.

Additional Information About CAM expenses

CAM expenses that you allocate to your tenants should be on a pro rata basis and determined on the square footage they occupy or rent in the building.

That means that the bigger space (square feet) the tenant rents then the greater percentage of CAM expenses they must be required to pay.

Even if you’re legally allowed to require your tenant to pay these expenses, the additional cost that you would add to the base rent of your tenant should still be reasonable.

Keep in mind that the additional amount of rent above the square footage cost that you receive should be used for the common areas maintenance and upkeep. Common areas maintenance includes the space accessed, used, benefited, or shared by all tenants. The CAM expenses can be used for keeping the hallways, elevators and stairwells, lobbies, and public restrooms in good condition.

The outside area, including the sidewalks and parking lots, and in some cases even for off site facilities, can also be covered in your CAM expenses.

Final Thoughts On Commercial Real Estate Lease Rent Rates

In this blog post we discussed how to set the rent rates for a commercial real estate lease.   We also discussed how to set to set the CAM expenses.  Combined, these two factors will help you not only increase profitability in your commercial real estate, but it will also help you attract and retain more tenants.  

Take the time to learn how to set the best rent rates.  Your return on your effort will be well worth it.

If you have questions regarding today’s topic, let me know by posting it in the comments section below.

 

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ARTICLE: How To Establish Base Rent And CAMS For A Commercial Real Estate Lease