Common Area Maintenance (CAM) reconciliation is an annual process that is required for many commercial property leases. The process often elicits a grimace from those conducting this activity each year. In this article we talk about 5 of the most common CAM reconciliation mistakes to avoid the next time you do the reconciliation.
At a high level, CAM reconciliation is easy. But the complexity comes in with the real-life application. This article addresses the most frequently seen mistakes and how to avoid them.
Mistake #1: Not Truly Conducting a Reconciliation
This CAM reconciliation mistake shouldn’t be on the list, but it is. Simply rolling over the Additional Rent or CAM Budget from year-to-year with no increase is not reconciliation. And this should be upsetting for you, your lender, and investors because without a reconciliation, you are eating into your cash flow. Take the time to conduct the budget-versus-actual analysis and make the necessary adjustments going forward.
Mistake #2: Messy Records
Owners often have to start from scratch and review all the expenses for the entire year. First, they must determine which expenses are overhead, operating, or reimbursable expenses. After that, the analysis begins with what the lease states in terms of cost pools, caps, and pro-rata allocations. To avoid this CAM reconciliation mistake, begin with a clean chart of accounts that spells out which expenses are recoverable versus overhead or operating expenses. Then, as expenses come in, immediately record them to the appropriate account. With good record management and a lease tracking system in place, reconciliation can go much more quickly.
Mistake #3: Errors or Delays in CAM Reconciliation
Whether they admit it or not, your tenants are waiting for CAM reconciliation each year so they can budget accordingly. Submitting the CAM reconciliation to your tenant later in the year or if your reconciliation is sloppy and contains errors, can invite additional scrutiny by the tenants and erode respect for the owner. You want this to be a professional, well-done operation. Have a good system in place and then have someone double-check your work and calculations, to ensure it is clear and correct.
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Mistake #4: Delaying the Final CAM Reconciliation After a Tenant Moves Out
When a tenant moves out, complete the CAM reconciliation as soon as possible after they vacate the premises. Don’t wait until the end of the year. Make it a clean parting and do it quickly. . Even if payment is legally or contractually required, it is much harder to collect any budget overruns months after your relationship has terminated. Set the expectation that your reconciliation is coming and follow through as quickly as possible.
Mistake #5: Not Knowing What’s Included in the Lease
Each lease is unique. Know what is included in each lease so you can plan and budget accordingly. For each lease/tenant, you must understand which expenses are in pools, which expenses have caps (and what those caps are), and what’s included (or excluded) in each lease for reimbursable expenses. Be sure to keep good records of each lease in order to expedite your CAM reconciliation process and avoid this common mistake. Using a robust lease management software can save you time by making important lease information easily accessible.
CAM reconciliation is a significant part of managing a commercial property. If poorly managed, it can create tension with tenants and cause a loss of cash flow. Take this activity seriously and have the right tools in place to make this process run smoothly each year.
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