Tag: CAM Reconciliation

  • A Simple Step-by-Step CAM Reconciliation Example

    A Simple Step-by-Step CAM Reconciliation Example

    The Basics of CAM Reconcilations

    For Texas retail and commercial property owners, the CAM reconciliation is the process to collect each tenant’s share of expenses for the prior year.  This calculation must be correct because of two reasons.  Number one is the relationship between the landlord and tenant.  Sending a tenant an invoice for undercharged expenses creates questions from tenants regarding how the property owner is calculating expenses.  The second reason the CAM reconciliation has to be correct is because of the owner’s responsibility for expenses.  If every expense is not accounted for on the reconciliation, it is difficult to go back to the tenants and ask them to pay for an unexpected expense. 

    The accounting for CAM reconciliations does not need to be a headache for property owners if done correctly.  I will walk through a simple triple-net (NNN) lease for retail and commercial properties so that you will feel confident when it is time to bill tenants for their lease recoveries. 

    Please note: this calculation is for a standard, pure triple-net (NNN) lease which is typical for local retail strips centers and simple commercial properties. If your building utilizes complex office leases with base years, expense stops, and cumulative caps, your reconciliation requires a customized lease by lease calculation.

    Gather the Baseline CAM Reconciliation Data

    Before we start the calculation, we must have two items: the total square footage of the building (gross leasable area) and each suite’s square footage. 

    The gross leasable area (GLA) is the total square footage of the building that can actually be rented out to tenants.  This square footage will be the denominator for the entire property.

    There should also be a master list of the exact square footage occupied by each individual tenant as defined in their specific lease agreements.  Where this information is kept depends on several factors but this can be stored on a spreadsheet or in the property management software.

    Exhibit A

    Note: CAM expenses generally cannot be charged to tenants for vacant spaces.  The landlord must absorb the vacant space share of costs unless there is a specific gross up clause.

    Calculate the Tenant Pro-Rata Share Based on Square Footage

    To determine how much of the annual expenses is each tenant’s responsibility, the pro-rata percentage needs to be calculated.

    The formula is Pro-rata % = Tenant suite square footage / Total building square footage

    Using the information from above, we get the following pro-rata shares

    .

    Exhibit B

    Calculate The Tenant Share of Recoverable Expenses

    The formula for the tenant share of expenses is Pro-rata share of expenses = Actual CAM Expenses X Pro-Rata Share Percentage.  For this example, the total CAM expense are $60,000.00.    Each tenant’s share is calculated below in Exhibit C.

    The same calculation is required for taxes and insurance. It is important to make sure taxes are correct given the amount of Texas property tax protests and adjustments. 

    Pro-Rata Share of Taxes = Pro-Rata Percentage X Tax Expense

    Pro-Rate Share of Insurance = Pro-Rate Percentage X Insurance Expense

    Note: If a tenant did not occupy a suite or space for the full 365 days, the expenses will need to be prorated according to the number of days the tenant occupied the suite.

    Calculate the Amount Due From or Credit Due to Each Tenant

    The next step is to calculate the amount due from each tenant if the estimated expenses were underbilled.  If the expenses were overestimated, the tenant is owed a credit.

    Property management software such as Yardi, MRI, or AppFolio have tenant reports to determine how much each tenant was charged per month for CAM, tax, and insurance.  If this information is kept in another form, you can still calculate the amount charged.  Determine the charges for the past year and deduct the expense for each NNN bucket (CAM, tax, insurance). For example:

    Mack LLC was charged $12,000 for the prior year CAM expenses.  Their calculated pro-rata share of actual CAM expenses was $13,043.48 per Exhibit C.  Mack LLC owes $1,043.48 to the property for the prior year expenses.

    Let’s assume Breeze Parts was charged $27,500.00 for prior year expenses.  Per Exhibit C above, the tenant overpaid CAM expenses ($26,086.96) for the prior year and is owed a credit of ($1,413.04). 

    The calculation is repeated for taxes and insurance and the tenant is sent an invoice with an amount due or a credit notice which are applied to the tenant’s ledger.

    Need a Bulletproof Simple or Complex CAM Reconciliation?

    Don’t let manual calculation errors drain your property’s profitability. At Andris Financial Services, we provide meticulous commercial property accounting, accurate spreadsheet design, and thorough lease reconciliations tailored to Texas property management standards to ensure you recover every single dollar you are owed on your Texas retail or commercial property.

    Need help verifying your square footage allocations or reconciling your property’s actual operating expenses? Schedule a consultation below to ensure your CAM calculations are accurate and contract-compliant.

    Schedule a Consultation
  • Did your CAM reconciliation leave money on the table?

    Did your CAM reconciliation leave money on the table?

    This time of the year is the moment of truth for commercial property owners and CAM reconciliations. By now, most prior year CAM (common area maintenance) reconciliations have hit the books. In a perfect world, the expenses (common area maintenance. tax, and insurance) would match the amounts charged to the tenants. This does not always happen. I have seen the same situations play out during my years working with commercial landlords and their CAM reconciliations.

    1. Underaccrued expenses: The recovered expenses estimated in December of the prior year did not include a major expense. This situation creates a huge discrepancy on the current year’s financials.
    2. The Tenant Surprise: The tenant receives a massive, unexpected invoice because the estimates were way off. Nothing kills a landlord-tenant relationship faster than an un-budgeted $20k bill in March or April.
    3. Sometimes the landlord does not want to have a bad relationship with the tenants and ends up paying for the unaccounted for expense.

    If all of this is a little familiar, I suggest the following setup to record recoverable expenses properly.

    1. The common area maintenance expenses should be recorded by their individual line items. For example items such as utilities, monthly landscaping, sweeping, and janitorial should be recording on their own line items on the profit and loss statement.
    2. Insurance policies need to be recorded on separate line items by the policy type. It is important to remember that not all insurance policies have a January – December policy date. The expense recorded for the year will include part of the prior year policy and a portion of the current policy.
    3. Taxes include property tax and margin taxes. Property taxes should be the only expense recorded in the property tax line item. Any expenses related to a tax protest should not be included with the property tax invoice amount itself. The margin taxes are estimated based on the current franchise tax rates and are recorded separately.
    4. If a tax refund is received for a prior year payment, a decision should be made whether to refund the overpayment when received or whether to include the prepayment on the recoveries in the next calculations.

    Another area where I often see industrial owners leave money on the table is the administrative or management fees. Most triple-net (NNN) leases allow the owner to recover a percentage of the total operating expenses to cover the overhead of managing the asset.

    If your reconciliation only accounts for the hard costs like sweeping and landscaping, the landlord is not being fully reimbursed for the soft costs of running the property. Whether the management fee is a flat fee or a percentage, failing to calculate this correctly across the entire portfolio can result in thousands of dollars in lost revenue every single year.

    Once the expenses are correctly categorized, the next step is to account for any work completed for which an invoice has not been received. This is where landlords potentially get in a bind. Leaving an expense unrecorded creates a huge variance on the financials and also leads to having to explain to the tenants why this amount was not included in their prior year recovery calculation.

    When a tenant receives a reconciliation that is clearly categorized, with property taxes separated from protest fees and and all invoices accounted for, it builds trust. It signals that the property is being managed by a professional who values transparency. A well prepared reconciliation acts as a shield against disputes. It is much harder for a tenant’s auditor to find errors when every journal entry is backed by a detailed expense accrual process.

    If your recent reconciliation felt like a guessing game or if you suspect you are under recovering on your asset, it is time for a financial deep dive. I help Texas landlords move away from the problem areas and toward audit proof, profitable property management.

    Contact me for a review or your reconciliations and your property financials.

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