In a typical commercial property, there are spaces that are leased by individual tenants and there are “common areas” that are shared by all tenants. For example, an office building has a number of office suites in addition to a lobby, elevators, landscaping, and security systems. These common areas need to be maintained for the mutual benefit of all tenants, but there are costs associated with doing so. Depending on the type of lease, these Common Area Maintenance (CAM) costs must be paid by either the landlord or the tenant and they need to be “reconciled” at the end of each year.
In this article, we will describe the “CAM Reconciliation” process. We will define what it is, why it matters, and what to look for in a commercial real estate lease to determine who is responsible for CAM charges. By the end, readers will be able to incorporate this information into their pre-investment due diligence process to determine if an opportunity is good fit for their own investment objectives.
At First National Realty Partners, we always review the leases in the properties we purchase to ensure we have a detailed understanding of our potential CAM responsibility. Doing so helps to maximize returns for our investors. To learn more about our current investment opportunities, click here.
Common Area Maintenance Charges (CAM) Explained
Common Area Maintenance Charges – also called CAM Expenses or CAM Charges – are the costs associated with maintaining the common areas of a commercial property. Depending on the property type, common areas can vary slightly, but they typically include things like: lobbies, elevators, hallways, parking garages, landscaping or parking lots.
In a so-called “gross lease” it is the property owner’s responsibility to pay all common area operating costs. In a “net lease” structure, the tenant pays base rent plus their pro rata share of the property’s operating expenses. A tenant’s share is usually calculated based on the proportionate share of square footage leased. For example, if one tenant leases 1,000 SF in a 3,000 SF property, they would likely be responsible for a third of the CAM costs.
Details regarding eligible CAM costs (property taxes, management fees, maintenance costs, snow removal, etc), and how each tenant’s responsibility is calculated are outlined in the lease.
What is CAM Reconciliation?
Logistically, tenants do not pay CAM costs directly. Regardless of the lease type, they are usually paid by the property owner, and then reimbursed by the tenant as part of their monthly rental payment. For this reason, it is important for landlords or property management companies to “reconcile” actual expenses each year vs. what was recovered from tenants. This process is known as CAM Reconciliation. To illustrate how this works, an example is helpful.
Suppose that it is the end of the year and the property owner sits down to calculate all of the money spent on common area maintenance throughout the year. Assume it is $100,000. Then, they go through and calculate how much money was collected from tenants that was earmarked for these expenses. Say it is $90,000. In such a scenario, the expense “recoveries” fell short of the actual costs so the property owner knows that they may be entitled to collect additional funds from tenants. It could also work the other way. If the property owner collected more than the allowable CAM fees, they would be required to return it to tenants.
Things to Remember Before The CAM Reconciliation Process
The bulk of these calculations are handled with sophisticated software systems, but there are a few important points that should be kept top of mind for both tenants and landlords, as well as the commercial property managers who work on their behalf.
- Transparency: When going through the reconciliation process, the property owner should be very transparent and relevant data should be shared with tenants to the extent they want to see it.
- Lease Structure: While the property owner should be transparent, they also need to abide by the terms of their tenant leases. Again, these outline exactly who is responsible for what and, if they are written well, there should not be much ambiguity about the reconciliation calculation.
- Double Check: Landlords/property management companies occasionally make mistakes. For this reason, tenants should always double check that the reconciliation calculations abide by the contractual lease terms. Spotting a mistake can save significant sums of money.
- Account For Changes: Operating costs are not the same every year. Instead they tend to rise slowly over time. Some leases contain expense “stops” that limit a tenant’s responsibility to a certain level. This should be accounted for in the reconciliation process to ensure both the tenant and landlord are abiding by the terms of the lease.
The broader point is that the CAM reconciliation process can be tedious, time consuming, and complex, but the process is important to the success of an investment to ensure that neither the tenant or property owner pay more than is required.
Making CAM Reconciliation Easier
Because the CAM reconciliation process can be tedious, it is not something that transaction participants necessarily look forward to. Fortunately, there are things that both landlords/investors and tenants can do to make it a bit easier.
Landlords & Investors
For commercial real estate landlords/investors, one of the most sensible ways to make the CAM reconciliation process easier is to leverage technology tools to automate at least some portion of it. There are a number of software tools that can manage this process and landlords/investors can investigate and demonstrate them to determine which ones are a best fit for their own needs.
For tenants, the answer is the same, technology. On the tenant side of the transaction, there are also a number of (different) software tools that can be used to identify and categorize expenses that are related to base rental payments versus the “extra” portion of the payment that goes towards their CAM expense responsibility.
CAM Reconciliation & Private Equity Real Estate
For landlords/investors, the tools needed to automate the reconciliation of CAM charges are expensive and they take time, training, and expertise to operate. For this reason, it can be helpful for individual real estate investors to partner with a private equity commercial real estate firm who will perform this work on their behalf.
For example, at First National Realty Partners, one of the things that makes us unique is that we have our own in-house property management function and part of what they do is to reconcile CAM expenses at year-end (and previous years if necessary) for each of our portfolio properties. This way, our investors can sit back and earn passive income while we take care of the leg work.
Summary & Conclusion
CAM expenses are those that are associated with the operation and maintenance of a commercial property’s common areas.
Responsibility for CAM charges are outlined in the real estate lease agreement. In a gross or “full service” lease, they must be paid by the landlord. In a net lease structure, they are the responsibility of the tenant(s).
In order to ensure both the tenant and property owner have paid their fair share per the lease structure, CAM expenses must be reconciled against actual expense reimbursements at the end of each calendar year.
The reconciliation process can be tedious and time consuming, but it is important to the success of an investment and can be made easier with the use of technology tools.
For investors who don’t wish to perform this task on their own, for whatever reason, partnering with a private equity firm can be an attractive alternative.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you would like to learn more about our commercial real estate investment opportunities, contact us at (800) 605-4966 or email@example.com for more information.