Magazine article Journal of Property Management

CAM Audits: Making Dollars and "Cents" of It All

Magazine article Journal of Property Management

CAM Audits: Making Dollars and "Cents" of It All

Article excerpt

When considering the lifespan of commercial real estate, the benefits of a proactive property manager who thorough understands thoroughly reads leases, understands the terms and language contained within them and their relation to the overall property, and is skilled in the practices of lease administration and CAM reimbursement, can be the difference between a failed investment and extraordinary returns.

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Whether negotiating a new lease or reading an existing lease, property managers and tenants are keenly aware of the base rent, how it compares to the market and how those payments affect NOI and the tenant's overhead. However, it is often those convoluted and poorly understood sections of the lease, regarding "additional charges" that can have a greater financial impact on the long-term success of a commercial real estate asset. Common Area Maintenance (CAM) charges are often glanced over by brokers, landlords, property managers and tenants due to a poor grasp of the language or economics. The impact of CAM charges on a commercial lease can either be financially devastating or a saving force, depending on how they are applied.

In the end, properly administered CAM expenses, through strict and equitable adherence to the terms set in the lease, benefit both the property manager and the tenant.

It is imperative that a property manager understands each section of the lease, particularly those sections concerning billing of tenants. Each lease for each tenant within a real estate project must be allowed to stand on its own, and it should be assumed that each lease has its own characteristics, motives and language. Property managers often find themselves mistaken when they assume that language or terms of one lease applies to another--or worse, applies to all of the leases within the same project.

RECOVERING REIMBURSABLE OPERATING

The following case study involves a power retail center consisting of several large big-box retailers that changed property management companies. On average, the previous management company recovered approximately 75 percent of reimbursable operating expenses from its tenants in the form of CAM reimbursement, despite its 100-percent occupancy. During the change in management companies, the new property manager believed that this recovery rate was unusually low for this particular property type. Each of the leases was carefully read, abstracted and applied individually and the tenants' CAM charges were recalculated.

Since then, the property manager has recovered more than 95 percent of reimbursable operating expenses despite difficult economic times and slightly reduced occupancies. How was the property manager able to achieve such a dramatic increase in recovery with no significant change in tenancy or leases? By carefully examining each individual lease and the expenses at the property, the property manager found significant expenses in which only certain tenants were benefiting, such as the trash-and rubbish-removal service. Big-box retailers often provide for their own services or maintenance (e.g. trash and rubbish, HVAC and building and roof maintenance) and therefore do not participate in all related expenses incurred upon the remaining areas of the property. In this example, the previous property manager recovered only 60 percent of the trash and rubbish costs, as the remaining 40 percent of the expense was unrecoverable from the big-box retailer who provided for its own removal service. …

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