A sinking feeling hits many people this time of year as tax time creeps closer. But for landlords in retail real estate, it can be a bit of a double-whammy: Not only are their taxes due, but the deadline for CAM reconciliations looms large as well.
Generally speaking, retail tenants’ reconciliations for common area maintenance expenses are due within 90 or 120 days of the end of the calendar year, per the terms of the lease. That’s why so many in-house teams work long hours (even all-nighters) sifting through leases in a herculean effort to calculate CAM charges for retail portfolios by the deadline.
CAM Reconciliations: How Losses Add Up Quickly
Busy property owners often have a hard time seeing just how powerfully incremental costs can pile up. Assume a tenant really owes you $4,500 but you collect only $4K in CAM charges for the year. This kind of slippage might seem minor, but small increments can turn into real losses surprisingly quickly: When you multiply the total number of tenants at a shopping center (or within the portfolio) by the number of years in which the reconciliations were incomplete or inaccurate, the losses can spiral out of control. And of course, whenever anchor tenants are involved, the dollar amounts can be substantial.
What is a CAM Reconciliation?
CAM reconciliations are about making sure the common area maintenance expenses reimbursed by the tenants (as in a shopping center) match the actual amount of expenses incurred by the landlord during the prior year. The CAM Reconciliation process includes poring over all leases to determine whether tenants owe the landlord money, or vice versa. Additionally, the reconciliations also involve notifying tenants of any amortized capital expenses they may owe to the landlord, per the terms of the lease.
Why Expense Reconciliations are a Heavy Lift
Shopping center owners tend to get behind on tenants’ CAM charges precisely because running these reconciliations can be a time-consuming, tedious and difficult process. The number-crunching involves poring over the general ledger for the property and comparing it, line-by-line, to the terms in retailers’ leases—a matching game that must be carried out through brute force.
Lease negotiations also tend to vary quite a bit. Certain tenants might agree to pay for janitorial costs or snow-removal, while others may negotiate exclusions from those expenses. Unfortunately, busy landlords tend to lose track of minutiae like this. No owner wants to send out CAM letters only to be rebuffed by multiple tenants who point to the incorrect calculations and refuse to pay the charges. When that happens, the landlord can feel as though the tenants are the ones making the collections, not the other way around.
CAM Reconciliation Software Late in the Game
Can CAM reconciliation software do the heavy lifting?
The short answer is … kind of. CAM reconciliation spreadsheets do not assemble themselves. Likewise, it still takes a comprehensive effort to fill out CAM reconciliation templates thoroughly and accurately. There’s simply no getting around the need for knowledgeable and highly detail-oriented people to understand and correctly input tenants’ lease information into whatever software you may use.
Close to the deadline, with only a month or two before reconciliations are due, it is too late to buy and install CAM reconciliation software with sufficient confidence to use for the prior year’s tenant letters. Doing so correctly requires that accounting systems are aligned and tested well in advance.
Common Area Maintenance Reconciliations and Tenant Relationships
In addition to the direct financial considerations in play, maintaining punctuality and accuracy with respect to CAM charges can also help landlords build stronger relationships with tenants.
When landlords meet their deadlines and are proactive about making sure tenants understand and accept CAM charges, the effort greatly reduces the risk of relationship-ruining battles over common area maintenance fees.
Owners with a history of running an orderly process fare better, in terms of their relationships with tenants, when expenses drastically increase, as they sometimes do. Efficiency also helps landlords avoid another difficult situation: Realizing that they have undercharged tenants for CAM expenses over a period of years. If the undercharge was substantial, local retailers, in particular, may not have the ability to quickly write the reimbursement check.
National retail REITs and smaller owners alike routinely rely on CREModels’ expert analysts to calculate and confirm their tenants’ CAM charges quickly and accurately. The process includes sending out standardized, consistent and easy-to-understand letters explaining the charges to all retail tenants prior to the annual deadline.
Unlocking Value by Ramping up Efficiency
As we noted in a recent CAM reconciliations case study, racing to complete CAM reconciliations raises the risk of mistakes that can be quite costly for landlords. When these expense reconciliations are incorrect or incomplete, landlords can rack up thousands of dollars in losses over the life of a single tenant’s lease. Even worse, they can force owners to provide large rent credits over an extended time period.
At CREModels, our analysts routinely see situations where landlords have granted base rent credits and are also failing to collect the full CAM charges they are due. Sometimes this owes to miscalculations, but other times the owner is letting CAM charges slide out of fear of losing struggling operators. By bringing in objective, by-the-book consultants, owners can ferret out all inaccuracies—both undercharges and overcharges—in the expense reconciliations for the property. This clearer picture then serves as a strong foundation for lease negotiations based on reality rather than hunches or hopes.
What are CAM Charges?
Common area maintenance charges are paid by tenants to landlords to cover expenses related to common areas at shopping centers or other types of properties. In addition to routine items like security, landscaping and trash pickup, CAM charges can include certain capital expenses incurred by landlords. If a property owner installs a new roof and upgrades the utilities in a way that can be amortized over 10 years, for example, tenants might be required to foot the bill. Alternately, leases might require owners to prove that a capital expense will lower overall operating expenses before it can be counted as a CAM charge.
CAM Charges and Real Estate Transactions
Careful attention to detail with respect to CAM charges is particularly important during the purchase and sale process. (See CAM Reconciliations at Acquisition, our blog post on the special dynamics involved with property transactions.) Many of our clients, upon buying assets, immediately ask us to run the CAM recs and get the properties set up for the following year. If closing prorations were handled inaccurately by the prior owner, the new landlord can face some unwelcome surprises come CAM rec season. This truing up of expenses and tenant credits when a property closes is a nuanced exercise. It requires careful consideration as to the downstream effects.
Typically, landlords use their budgets to estimate the monthly CAM payments their tenants should be contributing during the year (owners add these amounts to monthly rent bills). Establishing the reconciliation process during acquisition enables a new landlord to correct any miscalculations in these monthly charges by the prior landlord. In some cases, the prior owner may have overestimated these amounts. This forces the new landlord to hand out huge credits and collect lower CAM charges the following year.
But of course, a legacy of undercharging is possible as well, in which case the new landlord may need to start collecting higher monthly CAM contributions. When the reconciliation process is clear, punctual and orderly, tenants understand that the landlord is doing them a favor. The monthly payments are a hedge against tenants receiving huge reimbursement bills at the end of the year.
Additionally, onboarding a new property is also the best time for tenants to get a feel for how the property will be run under new ownership. When updated reconciliations are sent to make the new tenants aware of the new owner’s particular reconciliation process, it shows the tenants that the landlord is proactive and values transparency. Ultimately, that translates into greater trust. It also makes the reconciliation process much easier the following year. By then, the tenants will already be familiar with the new forms and reports, and the back-and-forth will be further reduced.
For the majority of shopping center landlords, CAM reconciliations should be completed by the end of March. Are you ready?