As seen in Doctor's Life Magazine
When does CAM Not Mean CAM?
By Jay Crandall, CCIM, DDS, MBA
Often I hear the question, “How much is CAM?” That is a great question, but similar to buying a car, there are a lot more questions that should soon follow in order to know the true benefits and costs associated with the lease you are negotiating.
When it comes to leases, you will hear the term “Gross” leases and “Triple Net Leases”. These are actually the two extremes in the leasing world. The vast majority of leases (especially when it comes to health professional space) are negotiated as triple net leases (NNN). There are a variety, or combinations, of leases that are available in between gross and triple net leases.
A Gross lease means that there is one number stated for the dollar per square foot. In effect, there is no CAM stated. You may be paying for CAM items, but it is rolled into one number. That number is multiplied times the square footage of the space and that number becomes equivalent to one year’s total rent. Divide it by twelve and you get a monthly rent. Multiply your monthly rent by 1.06 (6% state sales tax) and that is your monthly rent number (i.e.- $18 Gross for 2,000 sq.ft. office would be $36,000 annually, divided by 12 months is $3,000 a month, multiplied by 1.06, and the total rent would be $3,180 a month).
Gross leases are typically reserved for older professional buildings and industrial buildings. Typically there is little to no common areas and the building/space is dated. In this market, we’ve seen that some landlords have chosen to quote customary triple net properties as gross asking prices for a short period of time to produce cash flow. Others quote gross rental numbers (thus combining the Base Rent and CAM numbers), but the lease is actually a triple net lease.
Triple Net Leases are often depicted by three capital N’s after the base dollar rent value (i.e. - $18NNN). This originated when leases were referred to as single net, double net, and triple net. The easiest way to remember what is meant by each given net is to think that for each “N” the Landlord saying “No” to paying it. In a triple net lease, the landlord is saying no to paying the taxes, insurance, and common area maintenance. Is that fair, then?
The answer is “Yes”, and for those who own Class A and many Class B Medical or Professional Office Space (or want to own and lease medical properties on your own), you will want to do the same. The reason for this is that the CAM, or Triple Net Charges, are variable costs, while the Base Rent numbers will be a fixed number according to your lease (your predictable cash flow and Return on Your Investment (ROI).
Let’s assume you own this building. If the taxes go up or down, the tenant absorbs the increase or benefits from any reductions. The same goes for insurance costs. It is not unusual for both the tenant and landlord to do research together that benefit both from cost and coverage perspectives. This number is auditable at the end of each year and therefore often there is no money that is made by the landlord unless a management fee has been incorporated into the CAM (not typical in most of the properties in this area, other than institutional properties with commensurate benefits). Whatever the number is, that is what the tenant is charged. If they pay in more than the actual annual cost, they can be credited or refunded at year end.
You or your broker need to know what is contained in the CAM number, and therefore you can make a more educated comparison of not only the space rental, but the services and benefits associated with that property.
If you do not care to ever own a property, this is still important to you so that you can continue to monitor, anticipate, and budget your occupancy costs now and in the future. The occupancy number should be compared as a percentage of your gross revenues as well to really have a good idea if the property is in harmony with the present and future growth of the practice.
If you do plan on building your estate through purchasing real estate over time (Acquisition Phase), you will want to “buy as low as possible for that quality of space in the current market”, create a steady stream of cash flows (Ownership Phase – facilitated by CAM), and make money when you sell the property (Disposition Phase).
Not all properties are bought, owned, and sold where all three phases have been successful. Managing them, in the worst scenario, limits your downside. But in the best-case scenario it can lead to great wealth. Every property has a strategy. Make sure you take the time to make your plan, and then work it.
Jay Crandall, CCIM, DDS, MBA, is a 23 year resident of Southwest Florida and has been actively involved in the business community since 1986. Jay received his Bachelor of Science and Doctor of Dental Surgery degrees from Creighton University in Omaha, Nebraska. Ten years after opening his dental practice in Bonita Springs, Jay was diagnosed with cancer, and in 1997 was forced to sell his practice due to associated treatment side effects. Having invested in commercial real estate personally,and understanding the immense time constraints as a doctor to locate and secure properties for business operations and/or investment in the Florida real estate market, Jay chose to pursue a career in commercial real estate. To further his business education, Jay attended the Florida Gulf Coast University Executive MBA program and received his MBA degree in May 2001. He received his CCIM designation in October 2005. Jay is the past President for CIP, Commercial Investment Properties Group. He also serves as a Director of Synovus Bank and is Director and President-Elect for the Rotary Club of Naples. Jay resides in Bonita Springs with his wife Ann and daughter Elle.