CAM reconciliation is a lease term that is extremely vital to understand as a commercial tenant. Watch our detailed webinar or continue reading for a complete breakdown of red flags to watch for when reviewing your annual CAM charges and reconciliation statements.
What is Cam Reconciliation?
CAM reconciliation is when landlords compare estimated Common Area Maintenance (CAM) charges that tenants paid throughout the year against the actual property maintenance costs. This annual process determines whether tenants have overpaid or underpaid their share of operating expenses, based on their lease terms and pro-rata share of the property.
Without careful review of this process, landlords may charge tenants more than their fair share. Many tenants who overlook these details find themselves facing unexpected bills that impact their bottom line for years. While lease audits can catch unidentified fees, resulting disputes are often costly and time-consuming.
Common CAM Reconciliation Errors to Watch For
Common Area Maintenance fees often confuse tenants due to their complexity. These charges help offset property maintenance costs, including:
- Common area lighting
- Landscaping
- Snow removal
- Parking lot maintenance
Typically, landlords estimate these yearly expenses based on historical costs or budgets, then pass proportional shares to tenants through monthly payments. At year-end, the reconciliation process compares these estimates against actual costs – making thorough review crucial, as errors frequently occur.
Capital Expenditures Pass Through
Capital expenditures can be a point of disagreement between commercial landlords and tenants. Some landlords may require tenants to pay for certain kinds of capital improvements, while many tenants argue that these expenses are part of an owner’s investment in their property and, therefore, not their responsibility.
Given the grey area, landlords do sometimes pass on larger capital expenditures to tenants. It’s reasonable for a landlord to include routine replacement of light bulbs for a parking lot as a CAM expense; but larger projects, such as the installation of a $75,000 LED lighting system, for example, is a capital expenditure that, in most cases, cannot be passed through to the tenant.
Other examples of expenses that could be passed through incorrectly include roof replacement, major asphalt repairs/replacement, structural repairs, painting, and costs of renovating or repairing vacant units.
CAM Reconciliation Exclusions
Transparency over what your landlord should or should not be passing through under CAM is important. Often times, CAM expenses are clearly defined in the lease, along with exclusions. If there are certain expenses not stipulated in the lease, tenants can make a case for whether or not they should be excluded.
Reconciliations should be reviewed carefully to ensure the landlord is not passing through expenses that are to be excluded per the lease. Some typical exclusions include mortgage payments, leasing commissions, and attorney fees, which are more obvious.
However, other exclusions are easily overlooked. These include services performed for a specific tenant, or repairs that are reimbursed through insurance proceeds or other third party.
Understanding Controllable vs. Uncontrollable Expenses
Controllable expenses are those that the landlords can control through competitive bidding.
Uncontrollable expenses are those that landlords cannot negotiate. They typically include things like property taxes, utilities, snow removal and insurance.
Tenants can negotiate caps on annual increases in controllable expenses. Cap provisions can provide a ceiling on how much landlords can charge in CAM fees as well.
“If we find issues with these caps, the tenant may save in the future. Depending on the language of the lease, tenants may be entitled to collect from past year overcharges as well.” says Krista Mannion at Leasecake.
Fixed CAM
Given the variables and unpredictability surrounding CAM expenses, an alternative suitable to both parties may be to negotiate a “fixed” CAM with set annual increases and no requirement to reconcile at year end. This allows the tenant to plan and budget appropriately.
However, one disadvantage is that if the expenses are lower than the fixed amount, the tenant may have no rights to recover the overpayment.
CAM Reconciliation Solutions
At Leasecake, our team of real estate experts is available to help with CAM reconciliations as part of our professional services offering. We will review the terms and conditions of your lease documentation and compare it to what you’re being invoiced, ensuring that you are paying your fair share of expenses as spelled out in the documents. Instead of engaging landlords directly, we provide you with the talking points you need when engaging your landlord to dispute and/or collect any overages paid.
When it comes down to lease compliance and profit management, reviewing these charges and ensuring they adhere to the terms and conditions of the lease is critical to successfully managing your locations.
