CAM Reconciliation: A How-To Guide On One Of Property Management’s Trickiest Tasks
Keeping properties running smoothly and tenants satisfied are the key parts of a property manager’s role, but one aspect of that role that can be particularly complex is common area maintenance reconciliation.
CAM reconciliation, as it is commonly known, is the process of passing along some of the expenses of running a property — including repairs and maintenance, property taxes, property insurance and, to some extent, the salaries of on-site maintenance staff — to tenants, on top of their base rent. Then, at the end of the year, property managers will “reconcile” the fees they have collected to ensure tenants haven't paid too little or too much.
Not all leases include provisions for CAM reconciliation, but for those that do, calculating this amount correctly and ensuring the process is done properly can mean the difference between a properly administered lease and an under or overcharged tenant.
“If CAM reconciliation is not done properly, it can negatively affect the relationship between the owner and the property manager because they lose confidence in our ability to do something we should know how to do quite well,” said Jeffrey Lapin, CPM, ARM and distinguished real estate instructor.
Lapin is a longtime member of the Institute of Real Estate Management and the former president of IREM’s Sacramento, California, chapter. He is a certified IREM instructor who leads an annual webinar for IREM on CAM reconciliation. He walked Bisnow through a CAM reconciliation how-to.
Lapin said CAM reconciliation can be intimidating for property managers who haven't been through the process before, and often do not get training on this topic from property management companies. To avoid getting caught off guard, property managers can take Lapin’s annual CAM reconciliation webinar through IREM to learn what they need to approach this process with confidence.
“If you've never done it before it can be overwhelming because there are a lot of steps to the process,” Lapin said. “But if you break it down into manageable pieces, it's really a very logical process."
Learn What CAM Covers And What It Doesn’t
A key first step is to understand exactly what falls under the umbrella of common area maintenance and, just as importantly, what doesn't. Lapin said utilities, taxes and insurance are a large part of CAM reconciliation because they are often shared by many tenants.
He gave the example of a building with 10 tenants in it, but only one water meter. There has to be some mechanism by which the landlord can recover the cost of that water usage by the tenants. Similarly, tenants in a shopping center may be responsible for part of the cost of repairs and maintenance, from lighting to repairs and paving to paying the security staff.
However, while the adoption of new energy-efficient equipment is on the rise as building owners make a push toward sustainability, the cost of installing that equipment usually isn't covered under CAM.
“Capital improvements — things that are designed to last a lot longer than a year that have the possibility of extending the life of and increasing the value of the building or the property — those things are not CAM items,” Lapin said.
He added that the expense of operating that equipment, once it is installed, can often fall under CAM expenses.
Create A Methodology
Lapin said that depending on a building’s lease, there are a few different methodologies property managers might take to determine a tenant's CAM share. Sometimes, that may mean tenants pay nothing for the first 12 months they are in a property and begin paying a share on the 13th month. In other situations, there may be an expense stop, in which the landlord or owner pays a certain amount of dollars per square foot in CAM expenses, and then everything over that is allocated to the tenants. In most triple-net leases, tenants pay all CAM costs from day one.
While there are different methodologies property managers can use, it is important to come up with a clear plan and proper accounting for collecting CAM fees so that when the time for reconciliation comes, there are no surprises.
“The reason we call it a CAM reconciliation is because a reconciliation is a truing up, if you will, of the actual expenses that the tenant should have incurred versus estimates we might have collected from them,” Lapin said. “So, if you're doing it right, you're estimating in advance, collecting estimates during the year and then doing a reconciliation after the close of the fiscal or the calendar year. You ideally will not have to collect significant funds from the tenant or pay back significant amounts.”
He added that tenants who are familiar with their leases will often have their bookkeeper or accountant go over their CAM fees at the end of the year and, naturally, won't be pleased to discover they have been overbilled. Conversely, if a property manager hasn't set up a proper system for fees throughout the course of the year and presents the tenant with a large bill it didn't expect, that can also damage the relationship and potentially trigger an audit.
All of this can lead to unhappy tenants and a building owner who may have lost trust in property managers to do their job correctly. CAM fees can be a significant source of revenue for some properties, and if managers get the numbers wrong, building owners lose out.
Embrace Technology, But Remain Hands-On
Lapin said that while the accounting software that many of today’s property managers use can help make their lives easier by determining CAM fees for them, they shouldn't solely rely on technology to get the numbers right.
If an incorrect bill or CAM reconciliation statement is sent to a tenant, the tenant won't bring their complaints to the property accountant. They will blame the property manager. This is why property managers need to be hands-on with this process and understand where the numbers are coming from. Lapin said this process starts with having a strong understanding of every lease.
“Too many property managers either don't read their leases or they rely on an abstract of the lease and a summary of the terms,” he said. “They really need to get into each lease, especially with regard to the section about passing through these operating expenses, and really understand how it's written and if caps or exclusions apply.”
Lapin stressed that this process can be complex, which is why, ideally, a newer property manager should work under an experienced one who can explain the process. However, due to the high turnover rate in many buildings, that isn't always possible. This is where the IREM webinar can help.
“Someone who has never done this really needs to get some training,” he said. “IREM covers both the basics and the complexities of this process to set property managers up for success.”
This article was produced in collaboration between the Institute of Real Estate Management and Studio B. Bisnow news staff was not involved in the production of this content.
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