Real Estate & Related Terms Explained: CAM

Next up in our series on explaining real estate and related terms is another about commercial leasing. The term is actually an acronym and the concept ties into additional rent, which we discussed last week.

What is CAM?

CAM stands for common area maintenance. CAM comes into play in a multi-unit property where tenants share a common area(s). This common area can include common hallways, elevators, parking lot, landscaping area, utility rooms, common restrooms, and more.

How are CAM charges administered?

CAM charges are usually administered as part of the additional rent. Each tenant pays their proportionate share of the common area maintenance charges. Generally they come up with a figure per sq ft (ie. $2.00/ft, which would be the tenant’s share of common area maintenance for the year).  This budgeted CAM cost is usually billed monthly based on the budget and then reconciled with actual expenses at year end.

What else should I know about CAM?

CAM charges are sometimes advertised totalled with property taxes to give you a total additional rent figure. Sometimes they are advertised separate where they disclose a property tax number, plus a CAM number (ie. $5.00/ft for taxes and $2.00/ft for CAM total $7.00/ft additional rent). Certain types of properties will have higher CAM costs than others. A 20 storey office tower with several elevators and lots of common hallways and facilities will have higher maintenance costs than a small strip plaza with minimal parking and no common entrances or hallways. Sometimes CAM can also include a management or administrative cost to administer the bookkeeping of the common area maintenance and additional rent. This should be apparent when viewing the operating cost budget.

CAMs are another confusing topic for many people. Its important to understand what common areas you are responsible for as a tenant, what the maintenance of these areas is costing you, and what you are getting for those charges. Don’t be afraid to ask questions!

Real Estate & Related Terms Explained: Additional Rent

Last week to kick off our new series, we discussed a term related to commercial leasing (one of our specialities), triple net. Unfortunately, there are many confusing and interchangeable terms used in commercial leasing. Today we are going to explain additional rent, so you understand the breakdown of your rent payment every month.

What is Additional Rent?

The technical definition of additional rent is "any rent in addition to the base rent payable by the tenant". So this additional rent, in a triple net lease, would usually include the tenant’s share of the costs of the property, including property taxes, insurance, snow removal, repairs, and more.

What Else Should I Know About Additional Rent?

Additional rent is usually quoted as a dollar amount per sq ft (ie $7.00/ft). In our market, there is a field on MLS where you can input the additional rent figure for each commercial lease listing. That way you know what your total rent will be as a tenant. Add the additional rent figure to the base rent and multiply it by the square footage to get your total annual rent. Divide that number by 12 to get your monthly rent total. You should also know that additional rent is usually a budgeted number and it will be reconciled with the landlord every year depending on the actual operating costs of the plaza.

Why Does This Additional Rent Figure Vary By Property?

The additional rent will vary by property because the operating cost of each property is different.  One property could have a higher assessment value than another and therefore their property taxes are higher. Or if there are more common areas in a building, the utilities and maintenance cost of this space will add to the additional rent.  

If you see a property with an extremely low number, that can be a red flag that they are under estimating the operating costs and you will most likely see them increase substantially over the budget. Another general observation you can make about additional rent is that the newer the property is, the lower the repairs and maintenance costs generally are, therefore the lower the additional rent figure will be. The opposite is generally true of older buildings.

Additional rent is a confusing topic, so don’t be afraid to ask an expert. If you have any questions about additional rent in your situation, feel free to email us anytime ☺.

Real Estate & Related Terms Explained: Triple Net

Considering we do lots of commercial leasing, we come across triple net leasing every day. Very often we hear from potential tenants the same question: what does triple net mean? Today we are going to explain triple net leasing, so the next time you lease commercial space you’ll be able to understand your lease obligations.

What is a Triple Net Lease?

The technical definition of triple net leasing goes like this: a lease arrangement in which the tenant is responsible for paying in addition to their base rent all of operating expenses of the property. This includes property taxes, insurance and maintenance. Basically, you pay a base rent (or net rent as it is sometimes called) to the landlord, and you also pay your proportionate share of the operating costs of the property. So that the landlord is not out of pocket for any of the operating costs of the plaza, the tenant pays their share as they would if they owned the property. Typical operating cost items can include all of the following: property taxes, insurance, maintenance, repairs, common utilities, snow removal, landscaping, property management and janitorial (in some cases).

How is a Triple Net Lease Administered?

To use a plaza with multiple tenants as an example, the landlord will come up with a budget for operating costs (typically referred to as an operating cost budget), that sets out the yearly costs of operating the property, including the typical items mentioned above. They usually take that total and divide it by the total square footage of the property to come up with $/sqft amount (ie $100,000 operating cost budget, divided by 10,000’ in the plaza, equates to $10.00/sqft for operating costs).  This operating cost amount is then added to your base rent to get to your gross rent (ie base rent of $15.00/ft plus $10.00/ft operating costs equals $25.00/ft). You multiply this amount by your square footage and this gives you your total annual rent. Divide that by 12 and that will give you your monthly rent. By doing the operating costs this way, it smoothes out the costs over the year for the tenant, instead of giving them lump sum bills as they come up. Essentially the landlord pays the operating costs and then charges them back to the tenant throughout the year. In the case where you are leasing an entire building, this can be simpler and the tenant can pay the operating costs directly themselves as there isn’t a proportionate amount to share with other tenants.

What Else Should I Know About Triple Net Leasing?

By year's end, the landlord should reconcile the actual operating costs in relation to what was budgeted. At that point they will most likely either owe you a balance if the actual comes in less than the budgeted, or you owe them if the actual comes higher than budgeted. Some of the volatile operating expenses that can swing year to year include snow removal, common utilities and repairs/maintenance.

All triple net leases are slightly different in the way they are administered, but this gives you a basic understanding of the concept of triple net and what you should know.

New Series: Real Estate and Related Terms Explained

Over the next several weeks we will be doing a new series on the blog. In a nutshell, each week we are going to choose a term that we often find that is either confusing or misunderstood in our travels with our clients. We will define the term in verbiage that is easy to understand and expand on the concepts where necessary.

After this series we hope that you will be able to talk confidently about many real estate related topics. Sometimes, there are different terms for different items in different jurisdictions. For example, in Ontario (where we live and sell real estate), we use the term Condo for condominium ownership, whereas in British Columbia, they use the term Strata. So therefore, as experts in Ontario only, we will focus on terms used in our market.

The first post next week will be regarding a term that we get asked about a lot…triple net.

Readers: are there any terms you find confusing that you’d like us to touch on? We’d like to make this series informative so we’d love to hear from you.

THE TENANT PLAYBOOK: Negotiating with the Landlord

Having now identified the 'premises' of your operation, what are the next steps to follow as you approach the Landlord? As noted earlier, hopefully you have engaged the services of a qualified leasing specialist to assist in negotiating a lease deal with a particular Landlord.

The first step is to qualify yourself or your operation with the Landlord. In short, this is a background/bio of your business and your credentials as a Tenant.  This might include years in business, expanding/downsizing, number of employees, and why these new premises are "fit for the future".  Depending on the situation, you may need to provide financials (particularly if the Landlord is providing significant TI dollars), a credit report and/or references.

In the case of a ‘new start-up’, you may need to provide a Business Plan which lays out your sales projections, expenses, capital investment requirements, and working capital needs. Given the fact the business is new, this should be supported by your credentials on a personal basis. Landlords are typically adverse to new start-ups. The more details you can provide at the outset the better. Be prepared to have a conversation on a PERSONAL GUARANTEE, particularly if the Landlord is investing capital on your behalf into the premises.

Beyond lease rate terms (the dollars of the deal), what item or items are most significant to your future in this location? Is it a suitable TI allowance? An extended rent free period? Dedicated parking? Early termination rights? Restrictive covenants on neighbouring businesses? Whatever the key elements of the deal are, you need to make sure they are front and centre as you begin the negotiation. The key points need to be 'on the table' now when finalizing the formal lease document, not left for the lawyers to deal with.

Successful lease negotiations do not just happen, but are planned for and well-executed by Tenants and their Leasing Representatives. As with everything in life, you do not get what you deserve, but rather what you negotiate. 

Next up from the TENANT PLAYBOOK: papering the transaction and types of documentation. As always, we're just a click or call away from discussing investment opportunities here in Windsor – Essex!

Bonus: Investing In Real Estate – Building the Right Team: Mentors & Education

Ask any successful real estate investor and they’ll be sure to admit that they haven’t invented the wheel. They have taken ideas and concepts from other landlords and incorporated them into their investing business. The learning curve is much easier when you aren’t starting at square one.

Why do I need a mentor?

One of the best ways to learn the tricks of the trade is to find a mentor who is a successful real estate investor.  It's often that successful landlords enjoy talking real estate and will be happy to share some info. Pick their brain. Even if you take a few concepts, or learn to avoid a few mistakes over time, they can make you money or save you big money long term.

How do I find a mentor?

The best way to find a mentor, or like minded real estate investor, is to network. Look to see if there is some sort of real estate investment club in your local area. Talk to your realtor or other professionals on your team to see if they know of anyone they can refer you to. Networking is key in any business and having successful contacts can very much help you investing business.

What else should I know about staying educated?

Besides having a mentor, it is important to keep investing in yourself as a real estate investor. Continual learning will improve your understanding of the business and keep you sharp. There are numerous books on the subject, online classes, in-person seminars, and of course, blogs (like this one ☺) that have lots of information to keep you up-to-date on what is happening and what you need to know in your market.

Don’t be lazy. Aim to improve yourself continually and your investment business will thrive. Readers, do you have a mentor? What do you do to keep continuing your real estate education?

Investing In Real Estate – Building The Right Team: Series Recap

As a real estate investor, you have a lot at stake. It's important to remember to treat your investing as a business. As the CEO of your investing business, it's important to run your business properly to ensure its success.

As any good CEO will do, you need to surround yourself with the right help. It's hard to do it properly all on your own. Focus on your strengths and outsource the rest to the proper professionals.   You might not need every one of the team members we discussed in our series, but they should all be considerations for the future.

Make sure to value your time as an investor. Why spend your time mowing the lawn of your property when it could be spent analyzing your next deal? If you're busy with your career or family life and don’t have the time to take care of everything yourself, it doesn’t mean you don’t have time for investing in real estate, it just means you need to outsource.

One of the main reasons people hold back from investing in real estate is the horror stories they have heard about problem tenants or problems with the property (ie. flooded basement). One of the great benefits of outsourcing to professionals is that it minimizes your mistakes and potential liability as an investor. You don’t have to learn the hard way.

Remember, the path to real estate investing success and future wealth is a marathon, not a sprint.  Surrounding yourself with the right people will help you keep a steady pace on your journey and not stumble along the way. Now get moving!

This wraps up our series on building the right team as a real estate investor. Hopefully it was insightful and made you think differently about your chances of becoming a real estate investor.  We’d love to hear from you!