Common Area Maintenance (CAM) charges are one of the most contentious—and misunderstood—aspects of commercial real estate in California. For shopping centers and mixed-use projects combining retail with residential units, CAM represents the cost-recovery mechanism landlords use to maintain shared spaces while tenants and residents often suspect padding, misclassification, or unfair allocation.
CAM or "operating expenses" typically function as additional rent in net (NNN) and modified-gross commercial leases. The landlord budgets annual costs for maintaining common areas, allocates those costs across tenants based on their proportionate share, and reconciles actual expenses at year-end.
Typical CAM inclusions:
Typical exclusions:
Pure retail shopping centers have well-established CAM norms. Mixed-use projects add complexity because you're blending:
When these three systems aren't coordinated, you end up with disputes over who pays for what—parking garage elevators, shared landscaping, grease interceptors, fire systems serving both uses, EV charging stations, solar installations, and rideshare drop-off zones all become friction points.
Landlords view CAM as legitimate cost recovery: "We're maintaining the property to benefit all tenants and simply passing through actual expenses on a fair, prorated basis."
Tenants suspect overcharging and opacity: Studies show approximately 40% of CAM disputes arise from unclear reconciliation statements and misclassified expenses. Tenants can't verify whether charges comply with their lease when the reconciliation is vague or categories are lumped together.
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Understanding CAM mechanics is essential to building a defensible program. Here's how landlords budget, allocate and reconcile CAM charges—and where disputes typically arise.
Tenant's Share = (Tenant's Rentable Square Footage) ÷ (Total Rentable Square Footage in CAM Pool)
Example: A 2,000 SF retail tenant in a 40,000 SF shopping center has a 5% pro-rata share. If annual CAM is $200,000, the tenant pays $10,000.
In mixed-use projects, you typically need multiple CAM pools:
The allocation formula for the Shared Core Pool often becomes contentious. Options include:
In my practice, I see the same pattern: CAM language drafted in isolation from CC&Rs and vendor contracts, and then everyone is surprised when the numbers don't reconcile. The retail leases say one thing about parking lot costs, the residential CC&Rs say another, and the parking-lot-paving vendor invoice gets allocated using a third method no one documented.
Most CAM programs follow an annual cycle:
California requirements and best practices:
Industry studies show that a significant chunk of disputes—around 40%—arises from unclear reconciliation statements and misclassified expenses. Tenants can't verify whether charges comply with the lease when categories are vague or when capital improvements are lumped into operating expenses.
Sophisticated leases often include cost-control mechanisms:
Controllable CAM Caps: Tenant might agree to "no more than 5% annual increase in controllable operating expenses" (e.g., janitorial, landscaping, management fees).
Uncontrollable Exclusions: Real estate taxes and insurance are usually excluded from caps because landlord has limited control.
Drafting Tip: Be precise about what's capped vs. uncapped to avoid disputes.
In a base-year structure, tenant pays a gross rent that includes a "base year" of operating expenses. Tenant then pays their share of increases above base year in subsequent years.
Gross-Up Clauses: If the building is only 60% occupied in the base year, landlord "grosses up" variable expenses (e.g., janitorial) to what they would be at, say, 95% occupancy, so tenant isn't penalized for low occupancy in year one.
For mixed-use projects: Gross-up assumptions interact with different lease-up curves for retail vs. residential. Retail might stabilize faster, while residential ramps up over 18-24 months. Your CC&Rs and budgets need to account for phased occupancy when setting initial assessments and CAM charges.
This is where most owners feel lost. When you combine retail and residential in one project, you're operating at the intersection of commercial leases, residential leases, HOA law, and complex governance documents. If these aren't aligned, you're inviting conflict.
A typical mixed-use project has a governance structure that looks like this:
Covenants, Conditions & Restrictions (CC&Rs) and Reciprocal Easement Agreements (REAs) are recorded documents that define:
Leading real estate law firms describe a "Mixed Use Gap" where owners don't fully understand:
The result? Surprises when a major repair bill arrives and no one is sure whether it's a retail CAM expense, a residential assessment, or split 50/50 per the REA.
If your CAM language, CC&Rs, and budgets aren't coordinated, you're inviting conflict between retail tenants, residents, and associations. I see this constantly: the retail lease says "Landlord maintains all common areas," the residential CC&Rs say "Association maintains landscaping," and the actual landscape vendor contract is in the landlord's name with no clear allocation mechanism.
Retail and residential uses create natural friction points. Your CAM program and governance documents must address:
A simple diagram showing the flow of money and obligations helps immensely:
Owner/Developer
↕
Master Association (per CC&Rs/REA)
↙ ↘
Residential Association Commercial Units
(Davis-Stirling) (CAM leases)
↓ ↓
Residents Retail Tenants
(monthly assessments) (CAM as add'l rent)
↓ ↙
Shared Vendors
(landscaping, security, janitorial, elevator, HVAC)
Every arrow in that diagram should correspond to clear contractual language specifying what costs flow where, how they're allocated, and who has audit/approval rights.
Your commercial lease CAM provisions are the front-line defense against disputes. They must be clear, comprehensive, and compliant with California-specific rules—especially the new SB 1103 Commercial Tenant Protection Act.
Every commercial lease addressing CAM should include:
Here's a detailed breakdown of typical CAM categories and how California courts and statutes treat them:
| Cost Category | Typical Treatment | CA Considerations |
|---|---|---|
| Utilities (Common Areas) | ✅ Included | Electricity, water, gas for lobbies, parking, landscaping. Must be separately metered or allocated reasonably. SB 7 water submetering rules apply if passing through to residential units. |
| Janitorial & Porter | ✅ Included | Common restrooms, lobbies, walkways. Ensure service standards match lease language. |
| Landscaping & Irrigation | ✅ Included | Grounds maintenance, plants, hardscape repairs. Budget should reflect California drought regulations and water-efficient practices. |
| Security | ✅ Included | Patrols, cameras, monitoring. Document benefit to all tenants to avoid claims of landlord-only benefit. |
| Management Fees | ⚠️ Capped | Typically 3-5% of gross receipts. Must be reasonable. Excessive fees or double-charging (e.g., management fee + separate admin overhead) invites challenge. SB 1103 requires documentation. |
| Insurance (Common Areas) | ✅ Included | Property, liability, earthquake/flood for common areas. Must be proportionately allocated under SB 1103. |
| Repairs & Maintenance | ✅ Included | Routine repairs to common areas. Major capital improvements are typically excluded unless amortized per lease terms or mandated by code. |
| Capital Improvements | ❌ Excluded (usually) | New parking lot, roof replacement, major HVAC. MAY be included if: (a) mandated by law/code, (b) lease allows amortization over useful life, (c) improvement reduces operating costs. Must be clearly documented and justified. |
| Real Estate Taxes | ✅ Included (usually separate) | Often billed separately from "CAM" but same pro-rata principles. Ensure pass-through complies with lease and doesn't include penalties/interest from landlord's late payment. |
| Debt Service & Depreciation | ❌ Excluded | Mortgage, interest, depreciation are landlord's ownership costs, not operating expenses. |
| Leasing Costs | ❌ Excluded | Commissions, TI allowances, legal fees for lease negotiations—these benefit landlord, not tenants collectively. |
| Marketing/Advertising | ⚠️ Gray Zone | If marketing benefits the entire center (e.g., holiday events, center-wide promotions), may be included if lease allows. If it's leasing-focused or benefits only certain tenants, exclude. |
Controllable CAM Caps: Tenant may negotiate "controllable operating expenses shall not increase more than 5% per year." This typically applies to janitorial, landscaping, management fees—costs landlord controls.
Uncontrollable Exclusions: Real estate taxes, insurance, utilities often excluded from caps because landlord has no control over tax assessments or utility rate increases.
Drafting Tip: Define "controllable" and "uncontrollable" explicitly. Don't leave it ambiguous or you'll have disputes every reconciliation.
If the building isn't fully occupied, landlord may "gross up" variable expenses (e.g., janitorial) to reflect what costs would be at, say, 95% occupancy. This prevents tenant from subsidizing vacant space.
Formula: Actual Variable Cost ÷ (Actual Occupancy %) × (Gross-Up Occupancy %)
Example: $50,000 janitorial cost at 60% occupancy, grossed up to 95% = $50,000 ÷ 0.60 × 0.95 = $79,167. Tenant's share is calculated on $79,167, not $50,000.
Mixed-Use Consideration: Retail and residential lease-up curves differ. Your gross-up assumptions must account for phased occupancy per use.
Most commercial leases grant tenants the right to audit landlord's CAM records. Typical conditions:
SB 1103 Impact: Now landlords must provide documentation before charging for building operating costs (see below). This front-loads transparency and may reduce audit disputes.
SB 1103 adds California Civil Code §§1954.40–1954.46, creating new protections for "qualified commercial tenants"—microenterprises, small restaurants, small nonprofits in retail/restaurant space.
Who is a Qualified Commercial Tenant?
1. Proportionate Allocation of Building Operating Costs
Landlord must allocate "building operating costs" (maintenance, repairs, utilities, insurance for common areas) proportionately based on the benefit received by each tenant. No shifting costs from vacant spaces or other tenants onto qualified tenants.
2. Documentation Before Charging
Before landlord can charge a qualified tenant for building operating costs, landlord must provide written documentation showing:
This is a front-end transparency requirement—you can't bill first and document later.
3. No Changes Without Notice
Landlord can't change the allocation method mid-lease without 30 days' written notice and explanation.
4. Statutory Damages
If landlord violates these rules, tenant can recover:
Bottom line: SB 1103 raises the bar for CAM transparency and fairness, especially for small commercial tenants. Even if your tenants don't qualify, adopting these practices reduces dispute risk across your portfolio.
When your mixed-use project includes residential units, you're subject to California's tenant protection laws that constrain how you can charge for common-area costs, utilities, and other fees.
AB 1482 imposes statewide rent control and just-cause eviction requirements on most residential properties built before February 1, 2010 (with exemptions for single-family homes owned by individuals, condos, etc.).
Rent Cap Formula: Lesser of 5% + CPI or 10% annually.
Example: If regional CPI is 3.5%, maximum rent increase is 8.5% (5% + 3.5%). If CPI is 6%, cap is still 10%.
Landlords can't circumvent AB 1482's rent cap by imposing new "fees" or "assessments" that function as rent increases. Here's what that means:
Practical Tip: Disclose all recurring charges at lease inception. Don't surprise tenants with new fees mid-lease—it invites AB 1482 claims and tenant organizing.
California Civil Code §§1941–1942.5 impose an implied warranty of habitability on residential landlords. For mixed-use projects, this means:
Landlord must maintain premises in habitable condition, including:
Common-Area Implications: If residential hallways, lobbies, elevators, or shared parking areas become unsafe or unsanitary due to deferred maintenance, landlord breaches habitability warranty—even if the "CAM" budget is underfunded.
In mixed-use projects, retail CAM and residential association budgets must coordinate to ensure habitability duties are met. If the residential association is responsible for common-area cleaning per CC&Rs but lacks budget, and landlord controls the association, landlord may still be liable for habitability breaches.
Example: Shared parking garage elevator breaks. Retail lease says "Landlord maintains elevators," residential CC&Rs say "Association maintains elevators," but no one budgeted for major repairs. Residential tenants can't access units easily—landlord faces habitability claims even if blame is split contractually.
Effective January 1, 2020, SB 7 allows landlords of multi-unit properties to submeter or use a ratio-utility-billing system (RUBS) to charge tenants for water, but only under strict conditions:
1. Applies to Buildings with Building Permits Issued on or After January 1, 2018
Older buildings are grandfathered unless they install submeters.
2. Landlord Must Install Submeters or Use RUBS
3. "Just and Reasonable" Standard
Charges must be "just and reasonable"—no markup beyond actual cost. Landlord can recover:
4. Disclosure Requirements
5. Coordination with Mixed-Use CAM
If your project shares water service (e.g., irrigation, retail restroom water, residential unit water all on one master meter), allocation becomes complex. Options:
AB 1482: Violations (e.g., excessive rent increase or wrongful eviction without just cause) can result in civil penalties, attorney's fees, and actual damages.
SB 7: "Unjust or unreasonable" water billing can lead to tenant withholding rent, suing for refund, or reporting to local rent boards or consumer protection agencies.
Habitability Breaches: Tenant can repair-and-deduct (Civil Code §1942), withhold rent, sue for damages, or report to code enforcement—any of which can trigger inspection and retrofit orders.
Bottom line: Residential units in mixed-use projects require separate, careful treatment. Don't treat them like commercial tenants when it comes to fees, utilities, or maintenance obligations.
Your CAM program is only as good as the vendor contracts that generate the underlying costs. If your service agreements don't align with your lease language, CC&Rs, and budgets, you'll face allocation disputes, coverage gaps, and cost overruns that no one anticipated.
Most CAM costs are pass-throughs of vendor invoices:
If these vendor contracts don't define scope, performance standards, and cost allocation clearly, your CAM reconciliations will be messy and tenants will challenge them.
A Service-Level Agreement (SLA) is the section of your vendor contract specifying performance standards, frequency, and remedies. For CAM-related services, your SLA should cover:
1. Scope of Services
2. Performance Standards
3. Reporting and Verification
4. Remedies for Non-Performance
5. Coordination with Other Vendors
If your vendor contract has weak or missing SLAs, you can't hold the vendor accountable when performance slips. And when performance slips, tenants complain—and may withhold CAM payments claiming landlord breached the lease promise to maintain common areas.
Example: Retail lease says "Landlord shall maintain parking lot in clean, safe condition." Parking lot sweeping vendor only comes monthly per contract. Lot fills with trash, tenants complain. Landlord can't force vendor to sweep weekly without amending contract, and tenants claim breach of lease.
Your vendor contracts must allocate risk appropriately to protect landlord and tenants from third-party claims arising from vendor negligence.
1. Vendor Indemnity
Vendor agrees to indemnify, defend, and hold harmless landlord, tenants, and property manager from claims arising out of vendor's negligence or misconduct.
Example: "Vendor shall indemnify Owner from all claims, damages, and expenses (including attorney's fees) arising from Vendor's performance of services, except to the extent caused by Owner's sole negligence."
2. Insurance Requirements
Require vendor to provide certificates of insurance before commencing work and to notify landlord of cancellation or reduction in coverage.
3. Independent Contractor Status
Clarify that vendor is an independent contractor, not an employee or agent of landlord. This limits landlord's vicarious liability for vendor's torts.
4. Damage to Property
Vendor is liable for damage to landlord's or tenant's property caused by vendor's negligence. Vendor must repair or reimburse promptly.
Tenants paying CAM often ask: "Why am I paying for common-area insurance and also required to carry my own liability policy?"
Answer: Landlord's CAM-funded insurance covers common areas and landlord's liability. Tenant's policy covers tenant's premises, tenant's liability, and tenant's property. They're complementary, not duplicative.
Vendor insurance is a third layer—it covers vendor's operations and indemnifies landlord/tenants from vendor negligence. This reduces claims against landlord's master policy and keeps insurance premiums (which flow through CAM) lower.
Before signing a vendor contract, model how the costs will flow through your CAM system:
Bottom line: Your vendor contracts are the engine of your CAM program. If they're well-drafted, aligned with lease terms, and include strong SLAs and risk allocation, your CAM reconciliations will be smooth. If they're sloppy or misaligned, you'll spend more time and money fighting disputes than maintaining the property.