Nearly every week, we hear and see examples of owners and landlords struggling with their annual common area maintenance (CAM) reconciliations.
And even worse, we hear of owners that don’t complete the process at all. For a single-tenant, the owner’s cost of missing this activity could be thousands of dollars in a single year. Now, imagine that same scenario magnified over an entire portfolio! Or, imagine a calculation error that happened during the first year of a lease and has been compounded over many years of reconciliations. It’s easy to see how CAM reconciliation keeps many owners awake at night!
Why is CAM Reconciliation Such a Struggle?
There are many reasons why CAM reconciliations create such anxiety for teams. The reasons for this vary and are present throughout the process. Issues begin from the time initial lease creation through day-to-day management, and ultimately to close-out. Here are some of the most common issues:
- Leases with lots of gray areas for interpretation
- Poorly tracked work orders
- Inaccurate or missing material cost tracking
- Poorly tracked labor hours
- Poor categorization of expenses in the accounting system of record
- Competing priorities at the time CAM reconciliations are due
- Compounding previous errors in CAM reconciliation
- Poor communication of tenant/landlord verbal agreements
- Back and forth struggles between the landlord and the tenant following reconciliation
- Lack of a consistent reconciliation process
- Poor tracking of previous reconciliations
- Software not designed well to accommodate reconciliation
What is the Solution for This Struggle?
As with most big problems, stepping back and looking at the problem is the first right step. Based on the list above, where do you see your team struggling? Below are a couple of big things we see where most teams could benefit.
Standardization is a huge topic. And likely the biggest area where most companies struggle.
Let’s begin with the lease. Write a clear lease. Essentially, both parties clearly understand what is included in operating expense recovery and what is not. Look back at previous disputes to identify places where you can eliminate confusion. We all want standard leases. But, if there is a hole in your standard lease, fix it in future leases. It will save time and headaches down the road. While the leases are freshly written and fresh in your mind, identify sections you know you need to pay attention to for reconciliation.
Work Orders/Maintenance Standardization
How often do you send out a maintenance or repair person to take care of tenant reported issues, and the hours for that activity or costs associated with the work are somehow not tracked? Or, they are recorded from poor memory days, weeks, or months after the fact? Disciplined reporting is key here. You need a consistent process where your team tracks the hours, the activity, and the costs associated with any work. It should happen on the day the work is completed.
We recognize this is a hurdle for many teams. We suggest implementing a policy around this that is clear and straight forward with systems and tools that make this easy. And then, if the process is still not being followed, you can add punitive measures for employees/contractors that don’t follow the policy. We’ve seen this work too. No employee/contractor wants their pocketbook negatively impacted.
Accounting Record Standardization
If there is clear lease documentation and the work orders and maintenance tickets are meticulously kept, bookkeeping is easier! However, we realize that it will not always be the case. Here are a few things you should do:
- First, have a clean and consistent chart of accounts across all your companies. Consistency will reduce errors.
- Develop a procedure for properly coding expenses. The procedure should include coding expenses quickly while memories are fresh, and it is easier to put your hands on receipts.
- Complete your monthly bank and credit card reconciliations, so you catch problems quickly.
- Finally, develop internal controls for payments and approvals.
Who Says CAM Reconciliation has to be Done at a Certain Time?
Certainly, most leases require reconciliation to be completed by a specific time. Sometimes that is December 31st, but most frequently, you see leases where CAM reconciliation must be completed by the end of the 1st quarter. This means your staff’s time is consumed with competing priorities. They must deal with both CAM reconciliation activities and taxes at the same time. Once a lease is signed, unless amended, your date for CAM reconciliation is fixed. However, going forward with future leases, why not change that date? Why not make reconciliation a November 30th activity? This benefits both the owner and the landlord.
The landlord can complete reconciliation before people really shut down for the holidays. And, let’s face it, the week of Thanksgiving offers uninterrupted time to get real work done. To put a finer point on this, it also means your team can focus on one big task at a time rather than overlapping tasks.
For the tenant, well, this means they are receiving news of any needed increased adjustments on operating costs while finishing up their budgets. In short, this early notification allows them to prepare better for their year as well. As a tenant, receiving news there is a large amount due to the landlord for the previous year and then learning of an equally large increase for the following year is a double-whammy.
Subscribe to our Newsletter
STRATAFOLIO – An Automated Solution to CAM Reconciliation
Yet, in the end, even if your recordkeeping has been clean all year long, the activity of completing reconciliation takes time. The more tenants you have, the greater the task. We developed CAM Reconciliation as part of STRATAFOLIO to specifically address this. We heard the pain, we saw the losses, and we knew we could help.
STRATAFOLIO connects to your existing QuickBooks accounts. From there, we go through a mapping exercise to the CAM/Operating Recovery categories you use. You can see how much is being spent as the expenses come in and are coded accordingly. Then, at the end of the year, once all your expenses are in and coded correctly, you can pull a reconciliation report directly out of STRATAFOLIO and share that with your tenants. It really is as simple as 1-2-3.
Want to see this in action? Interested in using STRATAFOLIO to help manage your commercial real estate? Give us a call. We’d love to get you started with a free consultation and software demo!