Why is a CAM audit important?
As an owner, your goal is to maximize your return on investment – which includes optimizing cost sharing with your tenants. Although common area maintenance (generally referred to by the catchall term “CAM”) charges are a typical element in most commercial leases, their terms can vary significantly.
Because of this, in order to properly determine what CAM expenses each party is responsible for, you must first have a thorough understanding of the lease itself and the internal processes that are used to verify the validity of these charges.
In this blog post, we will examine the process of the CAM audit – but before jumping right in, let’s begin with an overview and take a look at why this practice is so important.
OVERVIEW:
The objective of a CAM audit (from an owner’s perspective) is to proportionately charge back to tenants, based on their lease agreement, the overhead costs of running a commercial property so it increases the owner’s return on investment (ROI) and maximizes their cash flow. While this process is certainly not a walk in the park, it can provide incredible insight and value to your bottom line. Not convinced? Let’s take a closer look:
While common area maintenance costs allocate a portion of certain property expenses to each tenant, the terms of each lease vary. These variations directly affect the obligation in which each tenant must cure such expenses. Take for example, the two basic calculations for CAM fees: variable CAM fees and flat CAM fees. If costs are variable, the amount a tenant is required to contribute can change based on a number of factors, throughout the term of the lease. On the other hand, flat CAM fees are simply fixed fees – they do not change at any time throughout the lease term.
What we are trying to say here is that there should never be a one-size-fits-all approach to understanding commercial leases because each lease is unique. Even for just a single tenant, incorrect lease interpretation or CAM calculations can end up costing you big time – and the longer the mistake goes unrecognized, the greater the damage. Having a thorough understanding of the terms of each lease can result in realizing the full profit potential of the property and it is here that the process of the CAM audit begins.
THE PROCESS OF THE CAM AUDIT:
STEP 1: The first step is to review all accounting to make sure that all invoices for the year have been captured and coded to the correct expense account. Keep in mind, you must always have an audit trail for these expenses in order to trace calculations back to their sources and verify them. If there’s no audit trail, there’s no way to determine how the system calculated the final billing.
An audit trail can be made up of electronic records, hard copy records, or a combination of the two. These records reflect the costs incurred by you, as the owner, throughout the year relating to each CAM charge.
Think of an audit trail as your back up – in order to prove the validity of information on your financial statements, everything must come full circle.
STEP 2: Once all invoices have been captured and coded to the correct expense account, the next step is to prepare the CAM reconciliations, but be sure to do so at the required time per the lease (this is important).
Take a look back at our January blog post for more information regarding CAM reconciliations and the preparation it entails.
STEP 3: Next, determine what expenses can be charged back to the tenant and which expenses are the owner’s responsibility to cure. The key is to always use the lease as a benchmark – it sets forth the rights and responsibilities of both the landlord and the tenant.
STEP 4: Time to issue the financial statements. An invoice or credit memo with supporting documents verifying your calculations needs to be sent to each tenant. Remember that your tenants will likely have an audit review process – that is, if the lease gives them the right to do so. If this is the case, typically a tenant must deliver written notice to the landlord within a specific time frame after the financial statement has been issued, stating they are exercising this right. However, a tenant’s election to audit your calculations may be deemed withdrawn unless the tenant completes and delivers their audit report to you in a timely manner. Where might you find the information needed to ensure your tenant is abiding by their lease terms? The lease of course – specifically the lease’s audit provisions.
Tip: Whether your tenant has the right to conduct an audit or not, if a tenant pushes back on any of the charges presented to them, it’s important that you take the time to answer their questions to ensure they understand their responsibilities relating to such expenses.
STEP 5: The final step – recover or reimburse. In other words, if a tenant paid more than the actual expenses incurred that year, then the tenant must be reimbursed accordingly. However, if the tenant paid too little, then it’s check-writing time on their end.
