A lease expressly provides reimbursement of shared-area operating costs under a CAM clause. What are these payments?
Correct Answer
A) Tenant reimbursements under the stated shared-cost allocation.
The stated CAM provision reimburses the specified shared operating costs according to the actual lease terms. Administration fees, caps, exclusions and allocation details can differ; a CAM label alone does not prove there is no profit component or that every cost is recoverable.
Why This Is the Correct Answer
Option A is correct because a CAM clause that provides reimbursement of shared-area operating costs creates tenant reimbursements under the stated shared-cost allocation. The amounts recovered depend on the actual lease terms. Tenant reimbursements may be included in income when the reimbursed expenses are included in operating expenses.
Why the Other Options Are Wrong
Option B: A sales-percentage rent clause based on tenant revenue alone.
Option B calls the payments a sales-percentage rent clause based on tenant revenue alone. Percentage rent is tied to the tenant's sales, whereas CAM payments are tied to shared operating costs.
Option C: An assurance of landlord profit above each cost.
Option C calls the payments an assurance of landlord profit above each cost. A CAM clause reimburses specified costs; a CAM label alone does not establish a profit above each cost, though some leases include administration fees.
Option D: A one-time fee paid at lease signing.
Option D calls the payments a one-time fee paid at lease signing. CAM reimbursements are ongoing recoveries of operating costs over the lease term, not a single signing fee.
CAM pays back shared costs
CAM stands for common area maintenance, and the tenant pays back its share of those costs. Check the lease for caps, exclusions and fees.
How to use: Use this when a question asks what CAM payments represent in an income analysis.
Exam Tip
Separate cost-based payments such as CAM from sales-based payments such as percentage rent. Avoid choices claiming a CAM label guarantees a profit or full recovery.
Common Mistakes to Avoid
- -Confusing CAM reimbursements with percentage rent
- -Assuming every shared cost is fully recoverable
- -Including reimbursement income without the matching expenses
Concept Deep Dive
Analysis
This question tests what common area maintenance (CAM) payments are in a lease. A CAM clause provides for tenants to reimburse the landlord for specified shared-area operating costs according to the lease's allocation. The appraiser reads the actual lease terms because administration fees, caps, exclusions and allocation methods can differ.
Background Knowledge
Commercial leases often pass some operating costs through to tenants, and CAM clauses cover costs of shared areas such as parking lots, landscaping and common hallways. How much is recoverable depends on the lease's allocation method, caps, exclusions and any administration fee. Appraisers treat reimbursements consistently with the expenses: if reimbursed expenses are included in operating expenses, the reimbursements may be included in income.
Real-World Application
An appraiser valuing a shopping center reviews tenant leases and finds that most tenants reimburse a pro rata share of parking lot and landscaping costs. The appraiser includes the reimbursements in income and the related costs in expenses so the analysis is consistent. Leases with caps or exclusions are modeled according to their actual terms.
More Income Approach Questions
Which model describes yield capitalization of property benefits?
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
The subject property is a fourplex with annual EGI of $72,000 and operating expenses of $28,800. Of those expenses, $18,000 is fixed and $10,800 varies in direct proportion to EGI. The owner's annual mortgage payments are $21,000. An appraiser projects that EGI will fall 10% because of higher vacancy. What is the projected NOI?
Annual NOI available for debt service is $168,000 and total annual mortgage principal and interest debt service is $120,000. What is NOI ÷ debt service?
Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Annual PGI is $640,000. Combined vacancy and collection loss is 6.25% of PGI. There is no other income. What EGI remains?
An appraiser is updating a prior appraisal of a triplex with potential gross income of $60,000 and no other income. The prior appraisal used vacancy and credit loss of 5% of PGI, and a new survey of competing rentals indicates 8%. The operating expenses of $24,000 are property taxes, insurance and contract services that do not vary with occupancy, and the market overall rate remains 7.5%. By what percentages do effective gross income and indicated value decrease?
Annual potential rental income is $600,000 and vacancy loss alone is $36,000. What percentage of potential rent does that loss represent?
In the subject's market, lenders on fourplexes have lowered their typical loan-to-value ratio from 70% to 60%. The annual mortgage constant remains 5% and the equity dividend rate remains 10%. The subject's NOI has not changed. How does this affect the overall rate indicated by the band of investment and the indicated value?
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Previous Question
An appraiser is valuing a duplex. A market survey of recent duplex sales reports prices at 10.8 times potential gross income, with stabilized vacancy and credit loss of 10% of PGI and no other income. The subject's rent schedule is unavailable, but the property manager's records show collected income of $54,000 a year, in line with market rent and the 10% market loss. What value is indicated?
Next Question
A tenant pays above-market rent on a month-to-month tenancy that either party may end on short notice. How should the above-market portion of the rent be viewed?