Understanding CAM reconciliation: What you need to know

What is Common Area Maintenance (CAM) reconciliation?

A CAM reconciliation refers to the calculation process that seeks to ensure that tenants correctly reimburse the landlord for the common area maintenance expenses incurred for a commercial property.

The lease agreements entered between the property owner and tenants define common area maintenance expenses. The agreements typically also address the following:

• The expenses to be excluded from the reconciliation. In other words, the costs the tenant is not responsible for.
• The intervals at which the reconciliation will be done, usually annually, semi-annually, or quarterly.
• The documents the landlord will provide to tenants to prove that expenses have been incurred.
• How the CAM expenses will be allocated to tenants. The standard practice is to apportion expenses based on the square footage occupied by each tenant.

Controllable vs non-controllable CAM expenses

Landlords should minimize CAM expenses to the best of their ability. This section of the post lists the controllable costs and those that are fixed or non-controllable.

Controllable CAM expenses

By exercising a little care and implementing a well-planned preventative maintenance strategy, landlords can control the following CAM charges:

• Janitorial services
• Fire and safety systems
• Landscaping
• Snow removal
• Administrative salaries

Non-controllable CAM expenses

The following expenses are more difficult or even impossible to control:

• Property taxes
• Trash removal
• Property insurance premiums
• Utilities

Why is CAM reconciliation important?

The primary objective of a CAM reconciliation is to ensure tenants pay their fair share of common area maintenance expenses. The reconciliation process should seek to verify that only genuine expenses are passed on and tenants are charged in accordance with the terms of the lease agreement.

The CAM expenses tenants must pay can often include indirect costs that can be difficult to allocate. Tenants can ascertain if they are being overcharged by referring to the reconciliation.

Common Area Maintenance reconciliation components

During the reconciliation process, it is imperative to proceed methodically. Here are the specific points to keep in mind when making the reconciliation or checking it:

• General ledger: The reconciliation begins with a careful review of the general ledger. The landlord should ensure that every expense is accounted for and backed up with the supporting invoice and other documents. Remember that the soundness of the reconciliation depends upon accurate and up-to-date bookkeeping.
• Pro-rata shares: How much is each tenant liable to pay? The pro-rata share calculation, which is usually based on the square footage occupied by each tenant, decides this number.
• Gross-ups: If a commercial property has vacancies, landlords use gross-ups to inflate each tenant’s CAM costs.
• Exclusions: The lease agreement stipulates the expenses tenants are not liable to pay.
• Recent transitions: CAM expenses are adjusted to account for the time a tenant has occupied the property. For example, if a new tenant has occupied the premises for only the last three months, asking them to pay for the entire year would not be fair.
• Expansions, contractions, and moves: CAM charges are increased or decreased for tenants who change the square footage of the property they have occupied during the year.
• Expense limits: The lease agreement can specify a ceiling for certain expenses. Typically, this applies to controllable CAM expenses.

Here are the reconciliation components in tabular form:

Common Area Maintenance reconciliation components

Reconciliation component	What to watch out for
General ledger	Ensure careful accounting of CAM expenses
Pro-rata shares	CAM charges are usually shared between tenants based on the square footage they occupy
Gross-ups	Used if there are vacancies in the property
Exclusions	CAM charges that cannot be passed on to tenants
Recent transitions	CAM charges are adjusted for the time for which a tenant has occupied the property
Expansions, contractions, and moves	Applicable if the tenant increases or decreases the square footage occupied
Expense limits	The lease agreement may specify expense caps for certain expenses

CAM reconciliation process

It is best to follow a step-by-step approach when carrying out the reconciliation:

Review the lease agreement

The best place to start is to study the terms of the lease agreement. Check what it says about CAM expenses, how they will be apportioned, documentation requirements, and inclusions and exclusions.

Gather CAM expense records

The relevant documents should back up each expense. Remember that tenants have a right to review these documents.

Calculate estimated vs actual CAM expenses

Although CAM reconciliations are conducted at the end of the year (or the end of the quarter or half-year), the process starts much earlier. Landlords should estimate CAM charges for the upcoming period and then compare them with the actual CAM expenses.

Prepare reconciliation statements

At the end of the period, reconcile actual expenses with the estimates. The objective of the reconciliation is to calculate if tenants need to pay any additional CAM charges or whether a refund is due.

Communicate with tenants

The final step involves informing tenants of the result of the reconciliation.

Common CAM reconciliation mistakes and how to avoid them

There are many missteps possible in the CAM reconciliation process. It is essential to be aware of these and take preemptive measures. Here are some of the pitfalls to avoid:

• Poor record-keeping: It is crucial to continuously monitor actual CAM expenses. Accounting entries and record-keeping should be completed on time. Additionally, every property owner should ensure that previous CAM reconciliations are available for reference.
• Overcalculation or undercalculation of CAM expenses: If the landlord overstates CAM costs and the tenants spot the error, they are bound to object. Even worse, they may accuse the landlord of overbilling. Understating CAM expenses, on the other hand, will lead to the property owner losing money.
• Failure to perform previous CAM reconciliations: If landlords can access the CAM reconciliation for each of the last five or ten years, the current year’s task will be much more manageable.
• Failure to formally add tenant-specific exclusions to lease agreements: Some tenants may need a specifically tailored lease agreement. You must do this to avoid asking tenants to pay expenses that do not pertain to them, which can lead to disputes.
• Incorrect allocation of expenses: An error in allocating CAM expenses may result in overcharging some tenants while undercharging others.

Why are CAM reconciliations so hard to get right?

Conducting a CAM reconciliation can be an error-prone process. Each expense needs to be categorized accurately, and the relevant documents filed so that they can be retrieved quickly if required. Subsequently, landlords must allocate CAM charges between tenants equitably and in accordance with each lease agreement. Keeping track of all these factors can be a daunting task.

CAM reconciliation challenges and how to address them

The good news is that there are several steps landlords can take to ensure that the CAM reconciliation is done accurately and in a manner fair to both the property owner and the tenants. Here are some of the points that need to be kept in mind when working on a CAM reconciliation:

Discrepancies in records

This can be the biggest bugbear when carrying out the reconciliation. You could face a situation where the landlord’s records say one thing and the tenant’s another. The best way to prevent this is to take extra care when preparing the reconciliation.

Capital expenditures

Misclassification of capital expenditure as an operating cost can invalidate the reconciliation.

Dispute resolution

Tenants may object to an expenditure included in the reconciliation, or the lease agreement may be ambiguous about certain CAM charges. A well-defined dispute resolution mechanism is essential to tackle such contingencies.

Regular communication

Landlords need to keep the lines of communication with tenants open. Disagreements are less likely if the property owner and tenants understand each other’s views.

CAM reconciliation best practices

Here is a list of best practices to follow in connection with CAM reconciliations:

1. Review and document the expenses: Efficient and up-to-date record-keeping is a prerequisite for a smooth CAM reconciliation. Landlords should have the data to answer tenants’ questions quickly and with conviction.
2. Property management fees: It is a standard practice for CAM charges to include property management fees. However, the lease agreement should provide for this.
3. Validity and accuracy of CAM fee calculations: Both the property owner and the tenants should review the CAM fee calculations with a fine tooth comb. Failing to spot an error or ignoring a stipulation in the lease agreement can have a sizable financial implication.
4. Thoroughly review lease agreements: The lease agreement is a crucial document as it lays down the methodology for CAM expense calculation, the manner for passing the expenses on to tenants, and the periodicity of the reconciliation. The landlord and the tenants must scrutinize the lease agreement and ensure they understand the implications of each clause.
5. Engage in regular financial audits: It is best to keep close track of CAM fees throughout the year. Regularly verifying accounting data reduces the work required at the end of the year. Additionally, it will be possible to spot errors early on and take the necessary corrective measures.
6. Regular property inspections: Regular property inspections can help identify problems in their initial stages. Following this practice can help you fix issues quickly and at a far lower cost. Assessing the property’s physical condition frequently can also help keep CAM fees low.
7. Generate invoices promptly: This simple and low-cost step can provide tremendous benefits. Issuing invoices on time allows landlords to collect money faster. Additionally, tenants get more time to check CAM expenses, enabling quick identification and rectification of discrepancies.
8. Stay updated on market trends: Keep in touch with current market practices. For example, automation can greatly benefit CAM reconciliations for larger properties. However, it is best to compare different software programs and understand how they work before switching over to one of the many automated CAM reconciliation software products available in the market.
9. Open communication channels: Landlords should inform tenants regarding CAM-related issues and vice versa. If both sides talk to each other regularly, it can help identify property maintenance issues early and nip potential problems in the bud.
10. Continuous learning and adaptation: If a practice has worked well in the past, it does not mean that it should never be changed. Landlords should stay abreast of the latest developments in the industry and seek to make improvements continually.
11. Leverage technology for efficiency: Automating standard processes can speed up the reconciliation and prevent human errors.
12. Obtain third-party information ASAP: Finally, collect third-party information as early as possible to speed up the reconciliation.

The bottom line

CAM reconciliations can be complex exercises. To be completed smoothly, they require the active cooperation of the landlord and the tenants. Additionally, strict adherence to the terms of the lease agreement is necessary. If both sides put adequate effort into the reconciliation process, the rewards can be significant. These include a well-maintained property and a positive rapport between the landlord and tenants.

Publish Date & Time : 25 Apr 2024, 11:27 am