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CAM reconciliation – get it right the first time

In real estate management, Common Area Maintenance, commonly referred to as CAM, are those maintenance items common to all the residents and/or tenants of a property.

For example, outdoor shopping malls may offer:

  • Gardens
  • Water fountains
  • Awnings
  • Pathways and sidewalks
  • Parking
  • Lighting
  • Furniture
  • Trash cans
  • Janitorial services
  • Security
  • Snow removal

These services benefit all tenants and guests. In addition, mall operators pay property taxes and insurance for the benefit of all occupants.

Consider the common area expenses incurred by mixed use properties. These developments may offer restaurants, shopping, and entertainment in addition to residential and maybe even office space. Allocating common area maintenance expenses across each of these sectors can be complicated. Do residents need to share in the expense of a restaurant’s trash removal? What about parking, lighting, insurance, and security? Residential needs are very different from commercial use.

CAM reconciliation, then, is the process of figuring out how much of the expense associated with maintaining common area services should be allocated to each tenant and resident. The terms of each occupant’s share of these expenses are typically defined in the lease agreement, which often describes CAM charges as “additional rent.” It’s the property manager’s job to reconcile the real costs of these shared expenses against the projected costs. Generally, CAM charges are based on each occupant’s pro-rate share or square footage of a property. And sometimes CAM expenses are paid in a lump sum that doesn’t change during the lease term.

Like rent, CAM expenses must be paid. And, like rent, failure to pay CAM expenses has the same consequences as a failure to pay rent. It isn’t easy to calculate the future costs of maintenance and repairs. These costs are typically estimated at the beginning of the year and allocated to each occupant monthly. If the actual expenses are more than expected, occupants pay the property owner the difference. This can be a problem if the difference is significant. If real expenses are less than projected, tenants and residents receive payment back from the management company.

Projecting CAM expenses correctly

It’s important that the projected common area maintenance expenses come close to the actual costs. If they don’t, clients and owners lose faith in the credibility of the property manager, damaging the property management firm’s reputation. Reconciling these expenses requires property managers to drill down to the requirements of each property, since leases are not all the same, and different occupants have different needs. Some spaces are under construction, some are empty, others have outdoor seating or are tenants that don’t require much beyond parking, landscaping, entrances, and lighting.

Common CAM reconciliation traps

There are many hidden traps in CAM reconciliation. It’s worth taking the time and putting in the effort to get it right, just like most of us do when paying our income taxes. If you don’t get it right, any unpaid expenses could become the management company’s problem, depending on lease terms. At the very least, large fluctuations in your projections could damage relationships with tenants and residents. Get the details wrong, and you may need to go back and re-bill every tenant, risking a major loss of confidence in your capabilities.

Some expenses, like landscaping and parking in a shopping mall, are usually always shared. But then there are expenses unique to a single tenant, like the awning at a coffee shop’s drive-thru window, or the outdoor seating at a restaurant. Knowing the details of every lease is critical to reconciliation, to fully understand who is responsible for what, and to what degree.

Typically, the property manager will set up a CAM pool to establish the costs that are relevant to every tenant, leaving out the expenses unique to a sole renter. In these cases, property managers need to be comfortable with the formulas for pooled costs, which differ among property types.

Another trap lies in lease-dictated deadlines, especially since not all leases are alike. There could be, for example, a reconciliation deadline. If the deadline is missed, you may need to absorb any un-allocated expenses. Some leases include that provision, and some do not, underscoring the importance of familiarity with every lease and leaseholder on the property.

Every property manager with CAM reconciliation responsibilities should take it seriously and take the time to get it right. If your current role doesn’t require you to perform these calculations and allocations, it’s worth learning to execute CAM reconciliations effectively, since your next role may be right around the corner, and require you to do so.

Comments

I am responsible for about 30 commercial tenants involving 6+ properties.

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