A Real Estate Investor’s Guide to CAM Reconciliations

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Key Takeaways

  • CAM expenses are those 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” real estate lease, they must be paid by the landlord.  In a net lease structure, they are the responsibility of the tenant(s).
  • 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 a commercial real estate investment and can be made easier with the use of technology tools.
  • For real estate 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.

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In a typical commercial property, there are spaces leased by individual tenants and there are “common areas” 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 for real estate investors.  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 commercial real estate 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.

The lease should outline details regarding eligible CAM costs (property taxes, management fees, maintenance costs, snow removal, etc.), and how each tenant’s responsibility is calculated.

What is a CAM Reconciliation?

Logistically, tenants do not pay CAM costs directly.  Regardless of the real estate 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.

Calculating CAM Reimbursement

CRE property owners usually perform CAM reconciliations on an annual basis.  There are several steps involved in calculating the CAM reimbursement:

  1. First, the property owner must be able to quantify the total CAM amount for the property. They are often able to do this with the help of property management or accounting software. 
  2. Common area expenses are allocated based on the amount of space occupied by each tenant.  So, the next step in the CAM reconciliation process is to calculate how much space each tenant leases. This information is typically included in the commercial leases signed with each tenant. Many property owners will also input this data into their accounting software or spreadsheets to make the process easier.
  3. Once the amount of leased space is calculated and total CAM expenses have been identified, the next step is to allocate total CAM to each tenant using the percentage of the property square footage occupied by the tenant. 

For example, if the commercial property has a total annual CAM expense of $100,000 and Tenant X occupies 22% of the property’s total square footage, then Tenant A is allocated $22,000 in CAM expenses.

  1. Once CAM has been allocated, it is necessary to compare it to the actual CAM charged over the course of the year.  It is important that property owners keep track of these charges throughout the year. Many landlords use accounting or property management software to help with this. It’s important to note that the landlord must be able to break out the actual CAM charged to each tenant.
  2. Once the actual CAM paid has been identified, the last step is to compare the CAM amount allocated to each tenant (calculated above using the square footage methodology) to the actual CAM amount charged to each tenant during the year. Ideally, these amounts will be the same, but there are probably differences.  If there are differences, then the tenant’s CAM charges need to be updated for the upcoming year.

For example, if the CAM allocation for a tenant in one year is $10,000, but the actual CAM paid is $7,000, then there is a shortage, and an invoice must be sent to the tenant.  Or, if the CAM allocation is $10,000 and the actual CAM paid is $13,000, then the tenant is due a refund.

Common Problems While Figuring Out CAM Reconciliation

Many property owners find themselves running into a few pitfalls that can make the CAM reconciliation more difficult and time-consuming than it needs to be.

The most common problem that property owners run into is disorganized lease information.  It’s easiest to complete a CAM reconciliation when all the lease information for a property is correctly entered into the accounting software or a spreadsheet.

Sometimes new properties are purchased during the year.  It’s especially important to make sure these properties are included in the CAM reconciliation process at the end of the year.  Leaving them out or forgetting to record the lease information will cause unnecessary hassle when trying to complete the reconciliation.

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 to keep in 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.

Why CAM Reconciliation Can Be Difficult

CAM reconciliations are most difficult with disorganized property owners.  Today one of the most important things a property manager or landlord can do to make the CAM reconciliation process easier is to maintain accurate accounting records.  Property owners have very good accounting and property management software available to them, but it is up to them to make sure that the information entered into the software is complete and accurate.  Failing to maintain good records puts the property owner at risk of making a mistake in the CAM reconciliation process by over or under changing tenants for CAM expenses.  Improper CAM billing can also create friction with tenants as we will explore in the next section.

Some property owners are not involved in the day-to-day management of their properties.  These investors might be unaware of the terms of the leases that they have with each tenant.  The CAM reconciliation process is easiest to complete when the person doing it has knowledge of each lease for the property.  If the property owner does not have this knowledge, it is usually helpful to work with someone who does, such as the property manager.

CAM Reconciliation & Tenant Relationships

CAM reconciliations can be a sensitive subject when it comes to tenant relations.  If the commercial lease is drawn up properly, the landlord and tenant should be aware of all the terms of the relationship, including rent payments, square foot allotment, occupancy term, and the specifics of the common area maintenance allocation and the CAM reimbursement process.  That said, no tenant likes to find out they are being billed for additional CAM charges at the end of the year. 

Property owners should be sensitive to potential tenant confusion related to CAM reconciliation because it can take a toll on the landlord-tenant relationship.  Many property owners and property managers put a plan in place to provide basic information to tenants to educate them on the CAM reconciliation process.  If a shortfall or surplus is found, it is important to communicate this with the tenant in a timely manner and explain any shortfalls in enough detail so they understand why they are being billed.  Most importantly, property owners need to make sure that they get the CAM reconciliation right on the first attempt to avoid creating tension with tenants.

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.

Tenants

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 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 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).

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 info@fnrealtypartners.com for more information.

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