The Shocking Financial Impact of Neglecting CAM Reconciliation

Learn why neglecting CAM reconciliation can have a devastating financial impact on both landlords and tenants in commercial properties.
The Shocking Financial Impact of Neglecting CAM Reconciliation

Common Area Maintenance (CAM) reconciliation might not be the flashiest part of property management, but it’s essential to running a smooth and profitable operation. Understanding the Impact of Neglecting CAM Reconciliation can help property managers avoid costly mistakes.

This process ensures that landlords are fairly compensated for maintaining shared spaces in commercial properties and that tenants pay their fair share.

When CAM reconciliation is neglected or mishandled, the financial fallout can be significant, hitting both parties where it hurts most: their bottom line. 

For building owners, ignoring CAM reconciliation has the impact of leaving significant sums of money on the table. 

The money lost due to this can run into the tens of thousands of dollars. Depending on the size of your portfolio, this amount may even be larger.

For tenants, timely and accurate CAM reconciliation offers several advantages, including increased transparency, a clear breakdown of shared space expenses, and accountability from property managers. 

This process aids in accurate budgeting, as tenants can adjust their financial planning based on actual costs. 

Reconciliation also prevents overcharges by providing credits for overestimated expenses and helps ensure landlords allocate sufficient resources to maintain the property, enhancing tenant satisfaction.

Let’s explore why CAM reconciliation matters, the financial impact of getting it wrong, and how to avoid the common snags that can turn a simple process into an incredibly costly mistake.

What Is Common Area Maintenance?

Common Area Maintenance in commercial real estate is about keeping the shared spaces—like lobbies, restrooms, and parking lots—running smoothly. 

Tenants contribute to these upkeep costs, with their share based on the size of their leased space. This includes everything from utilities and cleaning to security, repairs, and management fees. 

For more information on CAM Reconciliation, check out our free guide on the foundations of common area maintenance (CAM). This contains a comprehensive and complete breakdown of what cam is how to calculate pro-rata, and best practices.

What Is CAM Reconciliation?

CAM reconciliation ensures fairness in shared space expenses within commercial properties. At the start of the fiscal year, landlords estimate costs for maintaining common areas, and tenants are billed based on these projections. 

As the fiscal year wraps up, landlords tally and compare the actual expenses to those estimates. If the real costs are higher, tenants might need to chip in more. If lower, they could see a refund or credit. 

This balancing act keeps the financial relationship between landlords and tenants transparent and fair, ensuring everyone pays their rightful share.

For a more detailed explanation, check out our article which provides a deeper explanation of what is common area maintenance reconciliation.

The Urgency Of Timely Reconciliation

You must complete CAM reconciliation within the specific timelines, usually between 90 and 120 days, as outlined in lease agreements.

Missing these deadlines can result in disputes, financial discrepancies, and strained relationships between landlords and tenants. 

Timely reconciliation isn’t just a box to check. 

It’s a crucial financial safeguard that keeps both parties aligned with the agreed terms and prevents future complications.

What Should CAM Reconciliation Look Like?

Starting CAM reconciliation early in the fiscal year is vital to setting a solid foundation for next year’s budget. 

This process involves a detailed comparison of actual expenses against the estimated CAM charges collected from tenants. 

The goal is to achieve a near-even balance, where neither party owes a substantial amount by the end of the period. 

When handled correctly, this approach minimizes disputes and preserves a fair and transparent financial relationship between landlords and tenants.

The Process of CAM Reconciliation:

1. Early planning: Start the reconciliation process early in the fiscal year.

2. Expense review: Compare the actual expenses with the CAM charges collected.

3. Adjustment: Adjust the next year’s CAM charges based on the reconciliation results.

4. Final reconciliation: Ensure the final reconciliation leaves a minimal balance owed by either party.

The Impact of Neglecting CAM Reconciliation

Overlooking or mishandling CAM reconciliation can trigger serious financial consequences. 

Let’s examine a few scenarios to see how the costs can spiral over time and what that means for your bottom line.

Scenario #1: Not Doing CAM Reconciliation At All

If CAM reconciliation is overlooked entirely, the financial impact can be painful. 

As time passes, the gap between actual costs and what tenants have been billed will widen, leading to significant shortfalls or lost revenue that could have been captured.

Below, we show a table and a chart of what this looks like for the average property owner with just one building. The data is a conservative estimate based on a hypothetical financial situation at a shopping center with multiple tenants. Many commercial real estate owners have far more than one building.

In this scenario, we show what would happen if a property owner skipped annual reconciliations entirely, leaving them to operate in the dark. 

Instead of adjusting for actual costs, they continue billing based on outdated CAM estimates, unaware of the necessary changes to stay accurate.

As you can see below, the lost payments from neglecting to do CAM reconciliation add up fast. 

Our hypothetical building owner would lose $12,350 in revenue after three years. After five years, that number swells to $28,855.

In this scenario, failing to do CAM reconciliation after a decade leads to a startling loss of $84,415.

Scenario #2: Keeping CAM Charges At The Same Rate

Sticking with the exact CAM charges year after year without adjusting for rising costs is a recipe for trouble. 

This stagnant approach forces building owners to shoulder the growing expenses, slowly chipping away at profitability and turning what could be a balanced budget into a financial drain.

The charts below show the same scenario: a conservative estimate based on a hypothetical shopping mall with multiple tenants. 

In this scenario, we assume the property owner charges only for the base year but does not account for compound interest (assumed at 5%) or do a true reconciliation annually. 

This leads to extra holding costs for the owner until they reconcile and the true-up occurs.

Scenario #3: Applying A Standard Increase Without Reconciliation

Some landlords might choose the shortcut of applying a flat 3% annual increase to CAM charges without proper reconciliation.

While this quick fix might seem convenient, it’s a gamble that could lead to either overcharging or undercharging tenants, risking strained relationships and financial missteps.

In this scenario, the CAM amount invoiced to the tenant is increased at a set 3% year over year. It doesn’t consider the actual increases in the CAM charges that the owner pays out of pocket.

While this is better than not doing reconciliation, the charts below show that much money is still lost in this scenario.

In this scenario, our hypothetical property owner will lose nearly $4,000 after three years, increasing to almost $8,000 after five years. 

After a decade, the property owner could lose $17,513.

Scenario #4: Not Spending Up To The Cap

When landlords fall short of the agreed-upon cap on maintenance spending, tenants may express concerns about the value they’re getting. 

This shortfall often leads to demands for refunds or reduced future payments, straining cash flow and impacting overall revenue.

Not spending up to the cap is problematic because owners will owe the tenant the difference during true-up. This may cause an issue the following year when a considerable expense happens, such as resurfacing the parking lot.

If an owner doesn’t spend up to the cap, they will be responsible for more costs than they would if the cap wasn’t in place.

In the charts below, everything about the previous scenarios stays the same, but we assume the owner only spends half of the CAM total annually. 

We assume the owner is applying a standard 3% increase and factoring in compound interest at 5%, although they are not spending up to the cap.

In this scenario, the owner would have to refund the remaining CAM total to the tenants, which would be costly. 

After three years of only spending half of the CAM total, our hypothetical owner would lose more than $22,000.

After five years, the number would increase to $27,302. If everything stayed the same after a decade, the owner would stand to lose over $40,000.

The Financial Importance Of Accurate CAM Reconciliation

Accurate and timely CAM reconciliation isn’t just a task—it’s a financial lifeline that carries a significant impact when neglecting it.

Meticulously tracking and adjusting for actual costs prevents the slow leak of unaccounted expenses that significantly add up over time. 

This process safeguards landlords from shouldering unexpected costs and unlocks capital for more lucrative opportunities.

Imagine not doing CAM reconciliation at all and discovering that after a decade, you just flushed over $84,000 down the drain. Now realize that this estimate is for a single property, and the number for a dozen or two dozen properties is significantly greater.

Where else could that money have gone to? What other better uses could that substantial chunk of capital have been used for?

Embracing technology further sharpens reconciliation accuracy, reduces errors, minimizes disputes, and ensures everyone pays their fair share. In addition, if the right software is used, you and your team will be able to do cam reconciliation in seconds and avoid all the extra manual work or double data entry.

This is crucial to avoid long-term financial trouble for owners and tenants. 

Property owners must avoid potential pitfalls by diligently reconciling finances promptly and using technology to keep relationships transparent.

How STRATAFOLIO Can Help

STRATAFOLIO can assist commercial real estate owners with CAM reconciliation by providing a streamlined, technology-driven approach that can save thousands of dollars.

By utilizing STRATAFOLIO, owners can automate the reconciliation process, reducing the risk of errors and disputes while ensuring that all expenses are accurately tracked and fairly allocated. 

This frees up capital by minimizing unnecessary costs and fosters transparent and healthy tenant relationships. 

With STRATAFOLIO, property managers can efficiently manage CAM reconciliation, protecting their financial interests and enhancing operational efficiency.

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