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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.