For businesses leasing commercial spaces, Common Area Maintenance (CAM) charges are a necessary yet often complex expense. A CAM audit ensures tenants pay only their fair share of property maintenance costs, preventing overcharges and ensuring compliance with lease agreements.
Many tenants blindly accept CAM reconciliation reports from landlords without a thorough review, which can lead to unnecessary financial strain. This guide will help you understand CAM audits, key areas to scrutinize, and how expert assistance—such as that provided by Mohr Partners—can help you optimize costs and prevent financial discrepancies.
What is a CAM Audit?
A CAM audit is the process of verifying that the shared expenses billed to tenants align with their lease agreements. Since landlords pass on costs associated with maintaining shared spaces (such as hallways, parking lots, and landscaping), tenants must ensure these charges are accurate and justified.
Why is a CAM Audit Important?
- Prevents Overcharges: CAM charges are often prone to errors, such as miscalculations, incorrect inclusions, or inflated costs.
- Ensures Compliance: Lease agreements dictate specific CAM charge structures. Auditing ensures landlords adhere to these terms.
- Optimizes Costs: Identifying overcharges allows tenants to reduce expenses and negotiate better lease terms.
- Promotes Transparency: Establishing a clear breakdown of charges fosters a better landlord-tenant relationship.
Key Aspects of a CAM Audit
1. Understanding Inclusions and Exclusions
The first step in a CAM audit is verifying which expenses should be included or excluded, based on the lease agreement. Landlords can pass on costs associated with maintaining shared spaces, but there are limits.
Common Inclusions:
- Cleaning and maintenance of shared areas
- Landscaping and snow removal
- Security services and property insurance
- Utilities for common areas
- Fire protection and safety compliance
Common Exclusions:
- Capital improvements (e.g., major renovations, structural repairs)
- Landlord’s personal expenses
- Marketing costs
- Legal fees unrelated to the property’s management
- Excessive administrative fees
2. Base Year Calculations
A base year is a reference point for calculating annual increases in CAM charges. It’s crucial to ensure that:
- The correct base year is applied in the reconciliation report.
- Any increase in CAM charges follows the agreed-upon formula.
- No unauthorized escalations are included.
For example, if your base year is 2020, landlords can only increase CAM charges in relation to expenses exceeding 2020 costs, subject to the lease’s terms. If a landlord incorrectly applies a different base year, tenants might pay more than necessary.
3. Caps on CAM Charges
Many leases cap CAM charges to protect tenants from excessive increases. These caps typically set a maximum annual percentage increase (e.g., 5%).
What to Look For:
- Ensure the cap is properly applied.
- Verify that any increases comply with the lease agreement.
- Identify unexpected spikes in expenses that exceed the cap.
If the reconciliation report includes CAM charges that exceed the cap without justification, tenants should challenge these costs.
4. Controllable vs. Uncontrollable Expenses
Not all expenses are within a landlord’s control. Understanding the distinction between controllable and uncontrollable expenses can help tenants determine if they are being overcharged.
Controllable Expenses:
- Cleaning and janitorial services
- Administrative and management fees
- Landscaping and non-emergency repairs
- Equipment maintenance
Uncontrollable Expenses:
- Property taxes
- Utility rates (electricity, water, gas)
- Insurance premiums
Since uncontrollable expenses fluctuate due to external factors, landlords can pass these costs onto tenants. However, controllable expenses should remain stable, and any significant increases should be questioned.
5. Administrative and Management Fees
Landlords charge administrative and management fees for overseeing property operations, but these fees must be reasonable and transparent. Some landlords inflate these charges, leading to excessive costs for tenants.
Audit Checklist:
- Ensure admin fees are within industry norms (typically 3-10% of CAM costs).
- Identify duplicate or hidden fees.
- Challenge vague or excessive charges.
6. Capital Expenditures (CapEx) Compliance
Capital expenditures (CapEx) refer to major property improvements and renovations. Under most lease agreements, tenants should not be responsible for CapEx costs unless explicitly agreed upon.
Red Flags to Watch:
- Inclusion of costs for structural upgrades.
- Charges for long-term improvements instead of routine maintenance.
- Large, one-time expenses without amortization.
If a landlord tries to pass CapEx costs to tenants unfairly, tenants should dispute these charges.
7. Gross-Up Calculations
Gross-up calculations adjust CAM charges to reflect occupancy rates. Landlords may adjust expenses to simulate full occupancy if a building is partially occupied. However, miscalculations can unfairly increase tenant charges.
Key Considerations:
- Verify the gross-up percentage aligns with the actual occupancy rate.
- Ensure landlords aren’t inflating costs beyond a fair share.
Incorrect gross-ups result in tenants paying for services they aren’t using—making this an essential audit component.
How Mohr Partners Can Help
Navigating a CAM audit is complex and time-consuming, but Mohr Partners can simplify the process by providing expert oversight and strategic solutions. Their specialized team can:
- Review CAM reconciliation reports for discrepancies and errors.
- Ensure landlords comply with lease agreements.
- Identify cost-saving opportunities in controllable expenses.
- Negotiate with landlords to resolve disputes.
- Prevent overcharges related to admin fees, CapEx, and gross-up calculations.
By partnering with Mohr Partners, tenants gain a trusted advocate who ensures they only pay fair and justified CAM charges.
Conclusion
Performing a CAM audit is essential to protecting your business from financial overcharges and ensuring compliance with lease agreements. By thoroughly reviewing inclusions, exclusions, base year calculations, charge caps, and gross-ups, tenants can detect discrepancies and take proactive steps to reduce costs.
With Mohr Partners as your ally, you can confidently navigate CAM audits, save money and secure a fair leasing arrangement.
