3 things for landlords to remember about CAM reconciliations
INSIGHT ARTICLE |
Whether it’s for office, retail or industrial properties, the preparation of common area maintenance (CAM) reconciliation statements—those charges recoverable by landlords for maintenance costs under a lease—is often done not by accountants, but by property managers; in other words, professionals who typically focus on leasing and tenant operational and relationship matters are less likely to focus on accounting issues. The preparation of CAM reconciliations can be time-consuming and cumbersome, and certain less-common lease clauses can be easily forgotten. This can result in the landlord leaving money on the table.
Every tenant lease is unique and costs are variable; amendments can change them from year to year, increasing or decreasing costs throughout the term of the lease. Although the reconciliation process can be somewhat labor intensive, having a deep understanding of the terms of each lease can result in realizing the full profit potential of the property.
Following are three standard clauses in which a lease can result in a more profitable CAM reconciliation for landlords:
#1: Remember the interest
"Capital costs, or an allocable portion thereof, shall be amortized over the period determined by Landlord together with interest on the unamortized balance at 10 percent."
Many leases allow landlords to amortize capital expenditures over a period of time, typically for the life of the lease. These expenditures often include an interest charge, which some landlords forget to collect.
#2: Optimize the management fees
“A minimum management fee of 4 percent of annual gross building revenue may be charged.”
The owner of a building pays a management company for running the property. In certain cases, the owner will pay the management company less than the standard 3 percent fee. Often, a clause in the tenant’s lease allows the management company to pass through a minimum of 4 percent for this service. But management companies will often pass through only the fee that they are getting paid rather than the higher fee that the clause in the lease allows.
In many cases, passing through less than the optimal fee to the tenant is done to keep the tenant happy, and not out of negligence or expediency. But some clauses, in fact, dictate charging a minimum percentage and this is the amount that should be charged. Whatever amount the language in the lease stipulates, that’s the amount that needs to be calculated.
#3: Gross up calculations
“If at any time during a calendar year the building is not at least 95 percent occupied, Landlord may calculate the gross up of expenses based on 100 percent occupancy.”
Some leases allow landlords to gross up—or round up—expenses, based on the percentage of occupancy of the property. The costs of some CAM services, janitorial services or electricity, for example, are directly correlated to occupancy; others, such as landscaping, are not. Landlords should note the categories that they can gross up, and charge tenants accordingly.
When verifying revenue and expense, it’s important to perform proper due diligence. Keep these in mind when reviewing income statements.
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