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What are CAM and net leases?

QUESTION:

I own a small business, and I believe that I understand how to manage it pretty well. Real estate issues, on the other hand, have never been my strength. I have been looking at retail property for several weeks and I’m confused by some of the lingo. What’s a net? What’s a CAM?

ANSWER:

Commercial leases sometimes address the payment of certain items that you would not find in a residential lease. These items include taxes, insurance and maintenance.

A double-net lease, sometimes written as "NET2," requires that the lessee pay taxes and insurance. A triple-net lease, sometimes written as "NET3," requires that the lessee pay taxes, insurance and maintenance. In theory, double-net and triple-net leases save time and inconvenience for the lessor and lessee. If a minor repair must be done, the tenant simply has it done and pays for it. Major repairs, such as replacing a leaking roof, are sometimes specifically excluded from the tenant’s responsibility. Should taxes be increased during the term of the lease, the tenant is responsible. If the property that you are considering renting is in an area where the taxes may increase dramatically, you may wish to use caution here.

Keep in mind that in some states, including Florida, landlords must pay sales tax on their commercial leases. If your landlord does not deposit these taxes with the Department of Revenue, you may be required to pay them at some future date.

Shopping center leases are usually a percentage-lease type, for which there is a base amount of monthly rent and a percentage of the gross sales. This percentage usually decreases as the gross volume increases. Don’t be surprised if the shopping centers that you consider for your store also have rules and regulations about hours of operation, outside displays and employee parking.

Common area maintenance fees, CAM, are also frequently a part of a commercial lease. This requires you to pay a percentage of the maintenance costs for the walkways, landscaping and public areas. The monthly fee is usually based upon the size of your store, but is sometimes calculated as a percent of sales.

Another common charge is a monthly advertising fee. This is used for the general promotion of the shopping center, for special events and, in some cases, a cooperative sales or promotional event. This may also be a flat fee or a percentage of sales.

Keep in mind that these fees do add up and that each is negotiable. It is a common practice, for example, for a new tenant to ask for a few months’ free rent in the beginning of his lease. It is also common to have the landlord pay for leasehold improvements.

There are many factors to consider when negotiating and finalizing a commercial lease. You may wish to seek the help of a professional if you find that the location you want includes addressing more than one of the above issues.

This information is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.

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