Tenants negotiate the 15 per cent. The money is in the definition of the base it applies to.
A CAM administrative fee is a percentage, often 10 to 15 per cent, applied to the common area costs the lease defines, then shared by each tenant at its pro rata share. The definition of the base decides the bill: on an illustrative building with $2,970,000 of operating expenses, 15 per cent on everything is $445,500, while 15 per cent on CAM excluding taxes, insurance and the management fee is $255,000. The same 15 per cent costs a 4.0 per cent tenant $17,820 or $10,200 a year, 1.75 times as much, depending on one clause.
Worked in full in How to Read a Commercial Lease by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The administrative fee, also called an overhead or supervision fee, compensates the landlord for running the common areas: procuring contracts, supervising staff, preparing the annual reconciliation. Tenants rarely argue about the rate. The value sits in the words after it: "of Operating Expenses", "of Common Area Maintenance Costs", "excluding Taxes, Insurance and the Management Fee". A rate applied to taxes and insurance charges an overhead on bills the landlord simply forwards; a rate applied to the management fee charges an overhead on an overhead. All figures are illustrative.
| Item | Amount |
|---|---|
| Controllable CAM: cleaning, security, landscaping, repairs | $1,400,000 |
| Common area utilities | $300,000 |
| Property management fee charged to the pool | $120,000 |
| Real estate taxes | $900,000 |
| Insurance | $250,000 |
| Total operating expenses | $2,970,000 |
The tenant leases 6,000 sq ft of a 150,000 sq ft building, a pro rata share of 4.0 per cent. The administrative fee is 15 per cent. The building is 92 per cent occupied.
Administrative fee = rate × (operating expenses within the defined base)
Tenant's share = administrative fee × tenant area ÷ building area
Excel: =15%*SUMIFS(Amount,InBase,"Yes")*TenantSF/BuildingSF
Step 1, build the base from the definition. Mark each expense line in or out of the base exactly as the lease words it. A base of "all Operating Expenses" is $2,970,000. Excluding taxes and insurance leaves $1,820,000. Excluding the management fee as well leaves $1,700,000.
Step 2, apply the rate. 15 per cent of $1,700,000 is $255,000 for the building.
Step 3, take the tenant's share. 4.0 per cent of $255,000 is $10,200, or $1.70 per sq ft of the tenant's space. On the broadest base the same arithmetic gives $17,820, or $2.97 per sq ft.
Step 4, put it in the whole bill. The tenant's share of operating expenses before any administrative fee is $118,800, $19.80 per sq ft. With the narrow fee the bill is $129,000, of which the fee is 7.9 per cent. With the broad fee it is $136,620, $22.77 per sq ft, and the fee is 13.0 per cent of it.
| Base as defined in the lease | Base | Building fee | Effective rate on all expenses | Tenant, a year | Tenant, per sq ft |
|---|---|---|---|---|---|
| All operating expenses | $2,970,000 | $445,500 | 15.0% | $17,820 | 2.97 |
| Excluding taxes and insurance | $1,820,000 | $273,000 | 9.2% | $10,920 | 1.82 |
| Excluding taxes, insurance and management fee | $1,700,000 | $255,000 | 8.6% | $10,200 | 1.70 |
| Controllable CAM only | $1,400,000 | $210,000 | 7.1% | $8,400 | 1.40 |
The gap between the first and third rows is $190,500 a year for the building and $7,620 for this tenant. Read the other way round, 15 per cent on the narrow base is the same money as 8.59 per cent on everything, which is the figure to compare when two landlords quote on different definitions.
The fee on the fee. Including the management fee in the base charges 15 per cent of $120,000, $18,000 for the building and $720 for this tenant, for supervising the manager the tenant is already paying. Most tenant-side reviewers strike it.
| Rate | All expenses | Excl. taxes, insurance, management fee | Per sq ft, broad | Per sq ft, narrow |
|---|---|---|---|---|
| 5% | $5,940 | $3,400 | 0.99 | 0.57 |
| 10% | $11,880 | $6,800 | 1.98 | 1.13 |
| 15% | $17,820 | $10,200 | 2.97 | 1.70 |
| 20% | $23,760 | $13,600 | 3.96 | 2.27 |
A tenant offered a choice between 10 per cent on everything and 15 per cent on the narrow base should take the 15 per cent: $10,200 against $11,880. Over a ten-year lease with expenses rising 3 per cent a year, the broad 15 per cent costs this tenant $204,286 and the narrow one $116,932, a difference of $87,355, worth $57,532 today at 8 per cent.
For the owner the fee is not a recovery of cost; it is revenue against overhead the landlord would carry anyway. On the narrow base, $255,000 a year at 92 per cent occupancy brings in $234,600, which capitalised at 6.5 per cent is $3,609,231 of value. A buyer should read every lease to confirm the base before underwriting that line: if half the tenants have the narrow base and the rent roll assumes the broad one, the NOI is overstated by real money and the error sits in a line nobody audits.
Negotiating the rate and leaving the definition. Cutting 15 per cent to 10 per cent on the broad base saves this tenant $5,940; excluding taxes, insurance and the management fee at 15 per cent saves $7,620, and costs the landlord nothing in headline terms. The second mistake is forgetting that the fee rides on top of any cap: if the lease caps controllable CAM, check whether the administrative fee sits inside the cap or outside it, because outside it the fee keeps growing with the uncapped costs it is charged on. For how the cap itself compounds, see cumulative vs non-cumulative CAM caps.
The CAM pool, the caps and the clause-by-clause value bridge are in the free workbook for this book. For the share itself, see how to calculate a tenant's pro rata share of CAM.
Rates of 10 to 15 per cent are commonly seen, but treat any figure as illustrative and read the base. On the worked building, 15 per cent on all $2,970,000 of operating expenses is $445,500, while 15 per cent on CAM excluding taxes, insurance and the management fee is $255,000, an effective 8.6 per cent of all expenses.
A tenant should resist it: taxes and insurance are bills the landlord forwards, not costs it manages. On the illustrative building they total $1,150,000, and charging 15 per cent on them costs a 4.0 per cent tenant an extra $6,900 a year. Over a ten-year lease, excluding taxes, insurance and the management fee from the base saves this tenant $87,355 in total.
No. The management fee pays the property manager and is usually itself a CAM cost; the administrative fee is the landlord's overhead charge on top. If the lease applies the administrative fee to a base that includes the management fee, the tenant pays an overhead on an overhead: here 15 per cent of $120,000, or $720 for a 4.0 per cent tenant.
This article is one calculation from How to Read a Commercial Lease. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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