This is the time of year for resolutions, for planning and for, many of us in commercial real estate, common area maintenance reconciliations.
CAM (operating expense) reconciliation is a simple principle: Add up all of the operating expenses the building has incurred throughout the year and reconcile, or true-up, against the estimated CAM charges that you billed the tenants throughout the year. In practice, however, it often becomes a very complicated and time-consuming process.
We have taken over management of countless buildings, from other property managers or from owner’s who self-managed, who have suffered from sloppy reconciliations and estimates. The folly in inaccurate reconciliations is that substantial amounts of money may be left on the table (usually on the owner’s side) and, if a tenant does question or audit the reconciliation, a lack of organization and back-up (invoices) can result in a very time-consuming review and explanation process. This process can create tension and a lack of trust between the tenant and landlord. We view the accuracy of our reconciliations as one of the most important functions of our job.
Determined to streamline the process, I’ve watched countless “how to” presentations from the Institute of Real Estate Management, Building Owners and Managers Association and several property management software companies over the years. I’ve reviewed other reports, looking for ways to save time – and headaches.
While there are no silver bullets to simplifying the CAM reconciliation process, one piece of advice has always stuck with me: Prepare your spreadsheets early before you start entering the annual data.
The reason this matters is because the largest hurdles often are the little things. That’s because the many small tasks add up and eat up a lot of time when reconciling a property. Take the following scenario: You start the day with the best intentions, convinced that this is the day you’ll knock out the reconciliation for Otto’s Office Building. But three hours later, you’ve gone down so many rabbit holes you don’t know which one to take back up to the surface. Lucky Lawyers moved offices, Archie’s Accounting expanded its space and Carol’s Chiropractic renewed and reset its base year. And you’re still waiting for the last bills to trickle in so you can scrub your general ledgers and get all of the odds and ends out of the way. Sound familiar?
If you prep your software or spreadsheet properly before you begin, you’ll save yourself time and headaches. Just drop in last year’s expenses and next year’s budget and – voila! – out comes the final product.
Here are some of the items you should address before you really get started:
General ledger review. This is probably the most time-consuming task. Review the general ledger line by line to ensure every invoice is coded to the proper account, or even to the proper building. Without this step done correctly, the CAM reconciliation will not be correct.
Move-ins and move-outs. Make the proper adjustments for tenants who haven’t occupied for an entire year. For example, some new tenants, per their leases, may be required to start paying CAM before they start paying rent. Make sure your start date reflects this discrepancy.
Expansions, contractions and moves. If a tenant has changed the size of its space or relocated to a new space in the same building, you may actually have to do two reconciliations. If this is the case, remember to set up both ahead of time.
Pro-rata shares. Double-check them all. The pro-rata share may have changed during the course of the year (see above), or the pro-rata share that is in the lease may be different than what is calculated by your spreadsheet or software (we always defer to the lease).
Gross-ups. Often leases allow for the expenses and estimates to be calculated as if the building were stabilized, or 85 to 95 percent occupied. These calculations can be tricky and require some thought. You can determine your annual occupancy on Dec. 31 and have your gross-up multipliers ready to plug-in.
Amortizations. Do a quick pass of your general ledger with only possible amortization items in mind. This can bring to light any forgotten capital improvements that can be passed back to the tenants. Then get your amortization schedules done.
Expense caps. Many buildings have multiple tenants with different capital structures (the limit you can charge for expense increases from one year to the next, usually a percentage of the previous year) and you can’t remember them all, so get your head wrapped around them early and make notes.
Exclusions. Some leases will not allow the pass-through of certain items, like management fees, for example. Again, making yourself a reminder to omit these from the reconciliation and estimate will save you time later.
Any necessary third-party information. You may be waiting on a final bill on a long project or need to request a special report from a utility company or insurance provider. Don’t let them hold you up later, request them right away.
Tenants with special requirements. A lot of large, national tenants (i.e., chains) have very specific reconciliation requirements. Refamiliarize yourself with these details. I suggest doing these reconciliations first in order to get the difficult ones out of the way!
Run all reports at once. Running all of your reports at the same time is so much more efficient. To do this, create a checklist of reports you need for each property and create the folders in which to place them in advance. That way you won’t have to keep stopping and to gling between software to run a report that you need.
Finding the time to sit down and focus on CAM reconciliation is difficult enough. Add in the endless distractions of one-off items and your efficiency is dramatically reduced.
That’s why taking care of these anomalous issues is so crucial I call it “preventative preparation.” It streamlines the entire workflow and lets you get back to actually managing your properties.
Happy CAM reconciliations!