Nobody likes paying for things they don’t have to. But in commercial real estate, overcharges happen all the time—and it’s up to you to catch them. Lease administration and accounting are complicated, and it’s easy for landlords and tenants alike to make mistakes in routine processes.
In fact, overcharges are often simply an inevitable result of the way your monthly payments are calculated. Costs fluctuate throughout the year, but to keep your monthly bills consistent and ensure that your payments cover the landlord’s expenses, landlords frequently use annual estimates to determine your monthly charges, which then need to be reconciled against the actual expenses.
Unfortunately, your landlord won’t do this for you—they just send you the bills.
If you dread your annual CAM reconciliation, you are not alone. While in the history of retail, CAM charges were a fixed expense, now landlords pass increases in operating charges through to you, making the billing and reconciliation process more difficult to navigate.
But whether a landlord overcharges you accidentally or deliberately, as a tenant, you need to be vigilant about reviewing invoices and understanding your rights and obligations under your lease. This is where CAM auditing comes in.
In this article, we’ll discuss:
- What a CAM audit is
- Why they’re necessary
- The right to perform a CAM audit
- How they work
- When you should conduct a CAM audit
- How to avoid overpayments
Let’s start by clarifying what we’re talking about.
What is a CAM audit?
Before we explore CAM audits (also known as lease audits), let’s take a minute to understand CAM (Common Area Maintenance). A CAM provision requires a tenant to pay a pro-rata share of expenses that are included by the property owner for the operating and maintaining of the shopping center or building.
Items commonly included are parking lot repairs, utilities, landscaping, interior/exterior repairs and cleaning, insurance costs, snow removal, garbage and recycling services, security, and signage. In some cases even capital improvements can be amortized and added to your CAM expenses. Basically, any time multiple tenants benefit from a service, the cost may be divided between them—if the lease allows it.
A CAM audit is your opportunity as a tenant to review common area maintenance charges and contest any that don’t fall under your responsibilities according to your lease. This is generally considered a tenant right, which you have the choice to exercise or not (and you always should).
Why are CAM audits necessary?
If you don’t (or can’t) perform CAM audits regularly, you could be paying your landlords thousands of dollars more than you have to. Now multiply that across your entire portfolio. Every year.
It’s not uncommon for a CAM audit to reveal that you’ve been overpaying a landlord for multiple years. If you have multiple leases with that same landlord, a single audit can easily discover far more widespread problems.
In some instances, a landlord may intentionally try to pass through charges that aren’t allowed or overcharge you for services. But usually, the problem is rooted in two things:
- Monthly billing
- Lease complexity
Dividing annual expenses into monthly payments helps tenants keep costs more predictable throughout the year and ensures landlords can cover needed services when the time comes. This is typically based on historical expenses, but it may include estimated costs as well.
This format makes it easy for landlords to standardize billing, but the actual costs at the end of the year don’t always align with the projected costs. Making matters more complicated, your lease may include exclusions, caps, or different language for various services and charges. Your landlord sends you a standardized bill, you pay less based on your lease, their invoices indicate that you need to pay more at the end of the year, and so the audit demonstrates that you need to be reimbursed for the difference.
Unfortunately, landlords often won’t review the nuances of each tenant’s individual lease before billing them collectively for CAM expenses. Like you, your landlord may be managing hundreds or thousands of leases at once, so they’ll often take a templated approach to reconciling CAM expenses. They’ll bill you for anything that typically falls under CAM costs. If you’ve negotiated for unique terms other tenants don’t have, you may be more likely to get charged for expenses you aren’t responsible for.
At times, landlords may also attempt to pass through more ambiguous charges that require greater scrutiny to evaluate who is responsible for them. Or, they may be paying more for services (or using them more frequently) than they need to. CAM audits give you an opportunity to take a closer look at these costs.
The right to perform a CAM audit
A CAM audit is usually a tenant right defined in your lease. But even if your lease doesn’t explicitly give you the right to perform a CAM audit, you can negotiate this with your landlord at any time. You can also negotiate for stronger CAM-related terms at any time.
You may need to give up other favorable terms to get the CAM language you want, but it’s worth pursuing. Giving up the right to audit is essentially giving your landlord the ability to charge whatever they want for services. You’re handing them the power to overcharge you.
If your landlord refuses a CAM audit, you can also use a more roundabout (and less friendly) process to generate the same result:
- Refuse to pay suspected overcharges
- Threaten to sue
- Demand to review your landlord’s records
That’s not the ideal route for either party. And in retail, it’s rare that requesting an audit would come to that. CAM audits are the status quo. It’s a right every retailer should reasonably expect to have in their lease.
How does a CAM audit work?
While there are general principles regarding the CAM audit process, there are also a lot of variables, and it all comes down to the terms of your lease. These govern whether you have the right to audit, when you can audit, where you can audit, what you can audit, and the timeline of critical dates.
Ideally, you’ll be able to get all the documents and information you need directly from your landlord in the reconciliation process, but in some cases, you may need to travel to the location to perform the audit. Since your pro-rata share of CAM expenses is based on your store’s square footage, for example, you may want to measure in person to compare to the numbers your landlord is using.
Depending on the scale of your operations, complexity of your leases, and size of your lease department, you may choose to conduct CAM audits in house or through an outside firm. It can also make sense to use a combination of internal and external auditors, letting your team do a basic “topside” review and enlisting a firm to do a more detailed audit.
If you use an outside firm, some or even all of their compensation will likely be based on a percentage of the overpayments they find, incentivizing them to dispute everything they can. When possible, outside firms will also use these discoveries to target other tenants of the same landlord, though leases often have confidentiality agreements to discourage this.
Either way, the process typically works like this:
- Your landlord sends you CAM reconciliation documents including all invoices and receipts relating to CAM expenses.
- You pay the bills.
- Your lease accounting department or an outside firm cross-references these charges against your lease terms, noting any exclusions or caps, and identifying charges that may be duplicates or errors.
- You report any overcharges to your landlord.
- They review the audit and the lease and reimburse you for any overpayment.
How long it takes to review your charges depends on the complexity of the lease. Some charges are more difficult to review. The more invoices, exclusions, and caps you have to cross reference, and the more errors you discover, the longer the process lasts. A single CAM audit could take as little as 15 minutes, or it could take an entire day.
Depending on your lease, you may be able to charge your landlord an audit fee if you discover charges in excess of a predefined percentage. This fee is designed to cover the costs of conducting the audit, so you can sometimes charge more for audits that require on-site visits.
When should you conduct a CAM audit?
Your lease will typically give you a window to perform a CAM audit—these often last for multiple years. You should aim to perform every CAM audit possible before this window expires. You may wish to conduct your audits annually or in batches based on the window defined in your lease.
Some leases have year-over-year caps on expenses, so it’s important to keep clear records so you can analyze what you’ve paid in the past.
How to avoid overpayment on CAM expenses
As a tenant, you have a right to audit your landlord’s calculation of CAM to ensure you are being billed correctly. To help make the process simpler, it’s important to be aware of some key ways that retailers leave CAM reconciliation money on the table.
Calculate your pro rata share
Most retail leases will state that your pro-rata share of CAM expenses is a fraction. The numerator is pretty straight forward—it represents the square footage of the premises you are leasing. However, make sure you understand how the space is being measured—i.e. does it include the walls, or not? Where things get more challenging is understanding the denominator, which can greatly impact your liability. Therefore, it is very important to make sure you understand the definition of the denominator in the calculation. It can be “leased,” “leasable,” “occupied,” or “existing” floor area/building space, and these variations can result in big differences in your pro-rata share of expenses.
To help manage your costs, be careful about signing a lease that increases your share if other tenants move out—and consider negotiating a limit on the amount that your percentage can increase in a year.
Verify capital costs
Is your landlord charging for capital expenses that are disallowed in the lease? Are any of the intentional or overdue improvement/repair costs being passed through to you actually the responsibility of the landlord? Did the repair/activity benefit all the tenants as part of maintenance, OR is it a situation where the landlord unilaterally decided to make changes to the property that benefit a particular tenant or constitute deferred maintenance?
Errors often occur due to the inclusion of expenses that are outside the scope of “normal repairs, maintenance, and operations” and therefore are not legitimate pass-through expenses, so it’s critical to monitor all capital costs that are being passed through.
Cross-check charges and exclusions
Your lease’s operating cost clause defines the costs passed through to you—but too often, landlords set a blanket formula across all their tenants. You may have negotiated more favorable terms, including certain exclusions such as initial land costs, refinancing costs, costs incurred for specific tenants, interest or penalties incurred by the landlord, etc.—so make sure your lease language is being followed.
Avoid paying twice
In some cases, you have negotiated the direct payment for some services—such as utilities. However, you can’t be assured that your landlord is taking that into account under general utility costs. Ensure you are not being double charged for any services you pay for directly.
One way to minimize the risk of high CAM costs is to negotiate a cap on the amount you will pay for certain items within CAM or for the entire CAM expense. A CAM cap limits the amount by which your share of CAM costs can increase above the initial charge. Negotiating caps can take some pressure off the initial negotiation process and can help you avoid disputes at year end.
Streamline CAM audits with Tango
Tango Lease is a comprehensive lease administration and accounting solution used by thousands of businesses around the world. This all-in-one lease software includes a suite of more than 40 unique lease reports to help you analyze and organize your real estate portfolio. These reports make it easy to isolate specific information across your portfolio—including year-over-year CAM reconciliation details.
Schedule a demo of Tango Lease, and we’ll show you how to ensure you don’t pay more than you should.