Navigating CAM Reconciliations in Commercial Real Estate

Navigating CAM Reconciliations in Commercial Real Estate

NOTE: This is the second in a series of articles we are releasing in the coming weeks on commercial real estate and the unique accounting aspects that are associated with it.

Are you a property accountant working for a commercial real estate landlord that has been tasked to perform a common area maintenance (CAM) reconciliation on a commercial lease and you don’t know where to start? If yes, this was written with you in mind. To start, let’s first define what CAM reconciliations are and why they are performed in the majority of commercial leases.

If you’ve ever worked in an office, chances are you walked into a lobby to access your office space. There may have been a door security person when you arrived, and you may have taken an elevator to your office’s floor. You then likely walked down a hallway corridor to enter your office. At lunch, you may have picked up food and eaten at the building’s outside patio. Each of these examples (lobby, elevator, hallway, patio) are spaces shared and of use for ALL building tenants (e.g common areas, or the “CA” of CAM) that have expenses (lighting, HVAC, cleaning, property taxes, salary of security personnel, etc) required to keep them up (e.g. maintenance, or the “M” of CAM).

Thus, in the majority of most modified gross and net leases (see prior article about different lease types here), the tenant’s monthly payment includes an additional charge for common area maintenance, or CAM. Most often, the percentage of CAM allocated to each tenant is based on the square footage of the tenants space divided by the total rentable square footage in the entire building. For example, if you rent a 10,000 square foot office space, the building is 100,000 square feet in total and annual CAM expenses are estimated to be $120,000, the CAM expense allocated to the tenant would likely be $12,000 annually, or $1,000 per month.

Now that you hopefully have a good grasp on what CAM expenses are, what do reconciliations have to do with anything? Great question. The practical reality is that the CAM charges included in a commercial tenant’s lease are the ESTIMATED expenses for the upcoming year, and most leases require a reconciliation between ACTUAL and ESTIMATED expenses.

OK, so now you know what CAM expenses are and why a reconciliation is required. How do you actually do it? Here are step by step instructions and common issues to look out for.

  1. First, read the lease in detail. There should be a section on CAM charges that clearly defines what costs are included and excluded from CAM.
    1. Common issue here is that the lawyer that drafted the lease wasn’t specific enough about the included/excluded expenses and you have to make some judgment calls. What’s done is done, but if you find yourself in this situation, bring this to your boss and ask that it be made more specific via a lease addendum and/or for all signed leases going forward.
  2. Next, determine actual CAM expenses incurred for the entire building and then allocate those expenses based on the lease’s defined allocation methodology (again, likely based on square footage). These expenses will be found in your accounting system.
    1. Common issues here are that common area expenses are not easily identified in your accounting system (e.g. you only have one line for utilities where you should have a general ledger (GL) account for Utilities-CAM and Utilities-Non CAM). Best practice is to have CAM specific GL accounts (any accounting system can accommodate this) and/or CAM pools set up in your accounting system (softwares like Yardi Voyager can accommodate this). If your accounting system doesn’t have either, do your best for the current year, but make the changes now so you don’t have the same issue next year!
  3. Next, deliver your CAM reconciliation to the tenant and wait for their questions. And if actual expenses are higher than estimated, you will most certainly get questions!
    1. Common issues here are that the landlord’s accounting records (e.g your records) are not clean enough or significant expenses are not provided with underlying invoice and payment support, raising questions from the tenant. Don’t let this be you. Make your reconciliation as iron-clad as possible with excerpts from the lease, underlying invoices, etc. Generally speaking, the more support provided, the fewer questions you will receive.
  4. Lastly, once you have agreed on the reconciliation with the tenant, you now need to 1) invoice (or refund) them for the difference and 2) set up the new estimated CAM charges for the upcoming year (which will be actual expenses divided by the % allocation methodology discussed above).
    1. This should be the most straightforward step. As long as you have a calculator or ChatGPT, there shouldn’t be many issues here 🙂.

And there you have it. Hopefully this will give you the confidence to perform a CAM reconciliation next time your boss requests it!

If you have any further questions or comments on anything above, we’d love to hear in the comments below! Or alternatively, feel free to book a call with us here to discuss your unique situation in more detail.