A CAM (Common Area Maintenance) Reconciliation Review For Commercial Property OwnersPosted on January 15th, 2021
One of the most challenging, and sometimes overlooked, annual procedures for commercial property owners is the annual Common Area Maintenance (CAM) Reconciliation. This is because computing CAM impounds paid against actual expenses is time-consuming and can be confusing. However ignoring it, overlooking its potential, or performing the reconciliation incorrectly can cost owners money and can violate the owner’s responsibilities as listed with the lease agreement.
WHO IS RESPONSIBLE FOR CAM RECONCILIATIONS
Owners of office, retail or industrial properties need to have properly prepared CAM statements to recover those maintenance costs allowed under their lease. Most NNN leases require an annual reconciliation of expenses within a specified number of days after year end. Additionally, if a client demands an audit of CAM charges owners want to be able to produce accurate records. If you are unable to do so, you could be inviting legal issues.
Professional Management Companies should be able to address the annual CAM Reconciliation if you have hired one. If not, you cannot rely on your CPA or accounting service to take care of it for you. They generally do not become involved in this process.
WHERE TO START THE CAM PROCESS
First you must have a thorough understanding the details of the lease contracts you have for tenants related to recoverable expenses including items like HVAC, plumbing, elevator, landscape management, lot cleaning, pest control, roof repairs, property insurance, common area association fees, utilities, security, and more. If you have a professional management service, a portion of the management salaries, fees, and reimbursement of management office space, is appropriate.
Keeping clear records is essential to ensure the details of costs charged, distribution ratios, and other relevant expenses are properly documented.
CREATE A BUDGET
Begin your year by creating a budget that includes estimates for all the recoverable expenses. Based on these estimates, you will bill tenants, usually monthly, for their share of estimated expenses. Each lease is unique and can range from a Net Lease, where you as owner/landlord pass all the expenses on to the tenants to a Gross Lease, where the commercial property owner receives a fixed sum regardless of operating costs. Both are valid, as are all the variations in-between. Understanding your market is key for making the appropriate decision for your lease contracts.
Many leases allow landlords to amortize capital expenditures over a period of time, typically for the life of the lease. These expenditures often include an interest charge, be sure to know if you can include capital expenditures and interest. Collecting for these expenditures adds up to increase your ROI.
CALCULATIONS AND INVOICING
Within the time period indicated in the lease agreement, often within 90 days after year end, you must calculate the actual expenses for the previous year and reconcile these expenses with the impound amount you charged the tenant during the period calendar year based on your original estimates. As you perform your calculations watch for leases that include a cap on tenant expenses and be sure not to exceed these caps. Be attentive as well to certain expense exclusions which may be listed in a tenant’s lease agreement.
Remember some calculations are directly correlated to occupancy and some are not—for instance items like janitorial services and utilities are directly related to the occupancy level, other expenses like landscaping must be maintained regardless of the level of occupancy. You must be clear on which expenses you can gross up based on 100 percent occupancy and which you cannot.
Once you have all your calculations in order, have your accountant double check the numbers. Then send tenants an invoice showing amount owed or due.
WHAT IF YOU HATE PERFORMING CAM RECS?
I once had a shopping center owner tell me he hired The REMM Group to manage his property just because he dreaded performing CAM reconciliations every year. I don’t recommend you seek management for this reason alone. One option is to consult an independent reconciliation service to perform this function for you. However, the challenges of CAM do demonstrate why it can be more profitable to have professionals manage commercial properties.
At The REMM Group we make it our mission to increase the value of your asset and increase your return on investment. We don’t want to cost owners, we want to increase their income. A properly managed CAM account is a good example of how this is possible. There are many places from the design of the lease, to the collection of the fees, where experienced professionals can find ways to increase your ROI and assure you are compliant with the lease terms.
The other key component to remember is the opportunity-cost of the time self-management takes. What could you be doing with the time you have to spend collecting rents, answering telephones and the number of hours CAM reconciliations take?
If you think it may be time for a professional management team, or you have one but don’t feel they are doing the high caliber work you deserve, we would be happy to prepare a custom proposal for your property. Just call Sara D’Elia, CEO, for an appointment at (714) 974-1010.
Blog content written by Jan Melano and Susan McPeak