As we approach the mid-year mark, commercial property managers find themselves in the prime position to review and adjust Common Area Maintenance (CAM) expenses. Mid-year assessments of CAM charges offer valuable insights into current spend trends and allow for proactive adjustments, helping to avoid surprises and disputes at year-end reconciliation. In this article, I will delve into the importance of assessing CAM expenses mid-year and strategies for making effective adjustments.
Why Mid-Year CAM Reconciliations Matter
Understanding CAM expenses as they accrue is critical for both landlords and tenants. For landlords, CAM assessments provide insights into whether budgeted expenses are on track and if tenants' CAM contributions are appropriate. For tenants, understanding these charges halfway through the year can help in anticipating year-end expenses, assisting in budget planning.
Furthermore, mid-year assessments can highlight discrepancies, inefficiencies, or errors in the CAM expense process early, leaving ample time for corrections. This not only builds trust between landlords and tenants but also aids in maintaining transparent financial communication.
Key Elements to Assess
1. Actual vs. Estimated Expenses: Review actual expenses incurred to date against initial estimates. If actual expenses are significantly higher or lower, it might be an indicator that your initial estimates need revisiting.
2. Expense Categories: Scrutinize the different categories of expenses. Are there categories where spending is higher than expected? Identifying such trends can help in controlling costs. This is also a great time to double check that expenses are being coded to the correct expense pools if you are using real estate accounting software.
3. Individual Tenant's CAM Charges: Check if tenants' CAM charges align with their pro-rata share as stipulated in their lease agreement. Errors in these calculations can lead to significant discrepancies.
Making Adjustments
Once you've assessed the situation, it's time to make adjustments where necessary. Here's how:
1. Revise Estimates: If actual expenses are significantly off from estimates, revise the estimates for the rest of the year. This will give a more accurate picture of year-end totals. Best practice is to send a formal letter to tenant explaining the adjustment. This may also be a requirement of the Lease agreement.
2. Control Spending: If spending in certain categories is higher than expected, identify why and implement measures to control costs. This might involve better resource management or finding more cost-effective service providers. Just because the expense is reimbursable doesn’t mean the dollars should be spent. One of the easiest ways to strain Landlord - Tenant relations are high NNNs!
3. Correct Errors: Any discrepancies or errors identified in calculations should be corrected immediately. If necessary, adjust future CAM charges to ensure tenants pay their correct share.
4. Communicate with Tenants: Openly communicate any changes with your tenants. This will help maintain trust and give tenants the opportunity to adjust their budgets if necessary. No one is happy with unexpected expenses at the beginning of a new year.
In closing, Mid-year CAM assessments provide a proactive approach to expense management, helping to ensure accuracy, transparency, and financial health for both landlords and tenants. By carefully reviewing CAM expenses and making necessary adjustments, property managers can smooth out the reconciliation process, avoid disputes, and maintain strong tenant relationships. It's a practice worth investing time in - and one that can pay significant dividends as the year draws to a close.