Common area maintenance (CAM) is what tenants pay a landlord to maintain shared spaces such as lobbies, cafeterias, parking lot and restrooms. While every lease establishes the unique parameters for these costs, CAM payments are typically pro-rata, meaning they’re based on the percentage of usable square footage the tenant pays for.
In a shopping center, for example, the retailer with the largest store will usually pay the greatest percentage of costs for security, landscaping, cleaning, and repairs related to the shared space.
Since these costs can’t be completely known in advance, landlords often estimate them using historical data and divide them into monthly payments. While the aim is to be as accurate as possible, this inevitably leads to discrepancies between what you’ve paid a landlord and what you actually owe according to the lease.
And that’s where CAM reconciliation comes in.
CAM reconciliation is the process landlords use to evaluate whether the amount a tenant paid in estimated escrow charges was correct. This sometimes results in a landlord reimbursing a tenant for overcharges, but more often the tenant has to make up the difference. As part of the CAM reconciliation, landlords will provide an itemized breakdown of all shared expenses, along with what has been paid and what is owed (in either direction).
Depending on the terms of the lease agreement, CAM reconciliations may be due within 30 to 90 days after December 31. Once you, as a tenant, receive the reconciliation from the landlord, you have the option to compare what your landlord charged to what they paid and what your lease requires from you. You may at this point choose to perform a lease audit to verify that everything is accurate. It’s not unheard of for retailers and corporations to miss out on major savings because neither they nor their landlords notice an overcharge.
In this article, we’ll look at what CAM reconciliation includes, what makes it important, why it can be so difficult to get right, and how to prevent disputes—so you’ll never be on the hook for charges you don’t actually owe.
Common area maintenance includes expenses involved in the upkeep of spaces shared among tenants of the same landlord. They may be broadly grouped into controllable CAM expenses and uncontrollable CAM expenses.
Controllable CAM expenses are those over which the landlord has a reasonable level of control. In other words, they are goods or services offered in a competitive marketplace, such that the landlord has the ability to pick between different options to keep costs low. Controllable CAM expenses often come with an operating expense cap that limits the amount of increase tenants are expected to pay from year to year. They include things like:
- Repair and maintenance
- Administration salaries
- Garage expenses
- Capital improvements
Non-controllable CAM expenses are those that the landlord can’t reasonably control. They’re things like utilities where the landlord has essentially no choice to make. As such, non-controllable CAM expenses usually don’t have operating expense caps. Some examples include:
- Trash removal
- Snow removal
What makes CAM reconciliation important?
For landlords, CAM reconciliation is an important way to make sure they Are recovering all the expenses they paid throughout the year from all their tenants
. Their estimated expenses may have fallen short of the actual CAM expenses, meaning that they’ve been spending more than they are collecting as estimates from their tenants. Reconciliation gives them a chance to recoup those costs.
For tenants, the same possibility exists in the other direction. If their monthly payments have been above actual CAM expenses (or have included expenses that should be excluded or capped), then they’re owed money back.
Additionally, CAM reconciliation provides tenants with an inventory breaking down costs throughout the year. It ensures that each tenant is paying their proportionate share. And it provides the starting point against which a tenant may choose to perform a CAM audit.
Every lease is unique. While the wording may be the same as dozens of others in your portfolio, how it applies to your common area maintenance charges depends on the specific location, your co-tenants, and other circumstances that change throughout the year. In order to know what charges you’re really responsible for, you have to have an intimate familiarity with the terms of your lease, so you can accurately evaluate the charges your landlord has claimed.
Landlords often get this wrong for the same reason.
It’s extremely difficult for tenants to navigate the nuances of individual leases, especially at scale. Likewise, a single shopping center or office building may service numerous tenants, each with similarly worded—yet ultimately unique—leases. It’s easy to miss a clause or circumstance that lets a tenant off the hook for a specific charge.
Tango Lease’s CAM/OPEX Reconciliation tool automatically identifies relevant terms and audits charges from your landlord, ensuring that you never pay expenses you aren’t responsible for.
Lease terms will vary, but here are some common examples of factors that can come into play during the reconciliation process.
The landlord should go line by line through the general ledger, reviewing it to verify that every transaction and invoice corresponds to the correct accounts and buildings. This step may be time consuming, but it serves as the foundation for ensuring the CAM reconciliation process is completed accurately.
Pro-rata shares are used to determine the proportion of shared expenses each tenant is responsible for based on the amount of square footage each tenant is allotted. It’s crucial for every pro-rata share to be accurate so that no tenant ends up paying more than their fair share.
Additionally, landlords have a few different methods for determining the pro-rata shares. For example, they count only the usable square footage, or they may include the walls. They may also distinguish between “leased,” “leasable,” “occupied,” or “existing” space. Be sure you know how your pro-rata share is being calculated, and verify that it is being done equally and accurately for all tenants.
For buildings that are not completely occupied, landlords may opt to use a gross-up clause. This artificially inflates CAM expenses to match what they would be with complete occupancy, and then it charges tenants based on their pro-rata shares of that artificially inflated expense.
Let’s say a building with spaces for five tenants is currently leased by only four tenants, giving it 80 percent occupancy. For simplicity, we’ll assume an equal pro-rata share for each tenant. Let’s further say that CAM expenses come to $800. The landlord could “gross-up” the expenses to $1,000, charging each of the tenants 20 percent of those inflated CAM expenses. Each tenant would then owe $200 (20 percent of $1,000) instead of $160 (20 percent of $800).
In this way, the four tenants make up for the lack of a fifth tenant, covering the total expense of $800 themselves, rather than leaving the landlord on the hook for the additional CAM expenses.
Some leases prohibit landlords from charging CAM expenses for particular items, where you’ve essentially stated up front, “This is not my responsibility.” Unless the lease explicitly states that they are, you can also negotiate whether they should be excluded afterward.
For example, if your landlord is reimbursed for an expense through another means, they shouldn’t “double dip” and collect payment from you as well. Or, if you’re paying for an expense directly with a vendor or utility provider, that’s not something your landlord should also charge you for.
If you’ve recently moved into a new location or moved out of one, your CAM expenses shouldn’t be based on an entire year of renting. It needs to be adjusted to the time you spent in the facility. But it’s not uncommon for these adjustments to get overlooked.
The same principle holds true for your co-tenants. If one of them has moved in or out during the year, that will affect their pro-rata share, which in turn affects how much you owe. Landlords need to account for this in CAM reconciliation.
If the size of your space has changed, or if you’ve moved from one space to another within the same building, then you may be owed two reconciliations for the same year—one for before and one for after the change.
Your lease may include caps for specific types of expenses, particularly if it’s a controllable expense like marketing, advertising, labor, or supplies. Expense limits establish an acceptable level of cost increase that you will be responsible for. Anything beyond that expense limit falls on your landlord’s shoulders.
Disagreements over Common Area Maintenance (CAM) charges can lead to disputes with your landlord. These disputes take time and can be a costly and frustrating experience. Here are some steps you can take to avoid conflicts before they arise.
You should never sign a lease until you have a clear definition of CAM. If you believe your “additional rent” is excessive, and your co-tenants ought to bear a greater share of common expenses than square footage ratios permit (for example, their business uses more water, a larger portion of the parking lot, etc.), then make sure you raise the issue with your landlord before you sign the lease.
A broad definition of CAM is of benefit to the landlord, but you will benefit from a more detailed description of what is included and excluded.
Ensure the lease includes a provision granting reasonable rights to review the landlord’s books. Additionally, ensure audit rights can be applied to prior year reconciliations. If discrepancies are identified in the audit, you should retain the right to reopen prior years which may contain the same discrepancy. Access to this information will provide the necessary details to ensure accuracy.
The reconciliation process begins with the delivery of the year-end statement. Hold landlords accountable to its timely delivery. From a lease accounting standpoint, large fluctuations in a year-end settlement (that is not budgeted) are important to know sooner rather than later. Overpayments typically take time to recoup via rent credits, reduced escrows, etc., so having that information sooner results in fewer out-of-pocket costs.
When you receive reconciliations, record the date of receipt and begin to accrue any lump sum costs as soon as possible. Backup is commonly omitted, however, you won’t be aware of that until the reconciliation has actually commenced. Compare this year’s total cost to last year’s to ensure costs appear to be inline.
The initial review can aid in determining which reconciliations should be looked at right away and which can wait. “Reconciliation season” commonly begins immediately after the first of the year and lasts through the spring for many major landlords.
Chances are you have a great deal of information from past reconciliations at a specific location or even other locations with the same landlord. Clearly not all leases will have detailed language to support an easy interpretation of what you owe.
Ensure new lease agreements incorporate more specific language to provide greater clarity of inclusions and exclusions as well as minimize exposure to unplanned costs. Benchmark your CAM costs by landlord, geography and location type to better understand your outliers. As your portfolio grows with a particular landlord, so does your negotiating power. It is critical to understand your portfolio to spot trends and risks in variable costs.
Seek a technology solution that will help you reconcile your CAM against lease-specific language, detailed caps, line item exclusions, and variations to pro rata share. The more leases you have, the more complicated CAM reconciliation becomes, and the more valuable it is to have a comprehensive lease administration and accounting tool.
Retailers and corporations like yours make CAM overpayments all the time. It happens because both landlords and tenants lack the tools to efficiently navigate their lease portfolios. Even with a massive lease department, you’re bound to have human errors, especially with how difficult it is to detect some overcharges.
Tango Lease organizes your entire portfolio into an easily searchable database. Using artificial intelligence and machine learning, Tango’s CAM/OPEX Reconciliation tool helps identify expenses you aren’t responsible for. Our software helps audits and reconciles these expenses, freeing your team to focus on accounting opportunities that demand more of their expertise.
Want to see how Tango Lease streamlines CAM reconciliation?