If you’re a small shop owner accustomed to seeing reconciliations, the end product you’re sent is probably an invoice with a few calculations and a bottom line number due to or due from the landlord. If you’ve ever questioned aspects of the reconciliation it can be hard for the landlord’s representative to explain, and therefore even more difficult for the tenant to understand. This is especially true if there is a significant amount of money at stake or if things start to get emotional. My goal is to expand on the first entry of my blog (Tis the Season: CAM Reconciliations), which I recommend you take a few minutes to read over if you haven’t already.
The better you understand the mechanics of reconciliations the better you will be at productively discussing these issues with the Landlord. Nobody wants to find out they owe their landlord more money than they expected to, but at least that frustration won’t be compounded by a lack of understanding.
At the end of the calendar year (or sometimes the landlord’s fiscal year) the landlord looks back at their operating statements to see the exact amount of expenses in each category on their ledger. Some common examples are line items such as:
- parking lot repairs
- pylon sign repairs
- administrative expenses
- management fees
- utilities, etc.
They will also include real estate taxes and insurance in most cases. These should be actual expenses paid by the landlord during the time frame included in the reconciliation, and the landlord should have copies of invoices or backup that coincides with these expenses. How much they’re willing to share of that backup, if any, will depend on your lease and landlord. For use in this example we are going to assume the total of the landlord’s annual CAM expenses is $50,000.
In a standard NNN lease tenants pay their “pro rata share” of expenses. Usually this is calculated by dividing your space’s square footage by the gross leasable area (GLA) of the shopping center, but there are many variations of pro rata shares so read carefully when reviewing this lease section.
Also, a tenant’s pro rata share can vary between the NNN categories, so just because your share of CAM is one percentage doesn’t automatically mean your share of taxes are the same. For example, if the tenant rents 1,000 square feet and the sum of all rentable space in the shopping center is 30,000 square feet, then their pro rata share is 1,000/30,000= 3.33% of the expenses.
Now that we know the total amount the Landlord spent on CAM for the shopping center, and the tenant’s pro rata share, we have two of the three necessary variables for the reconciliation. The final piece is finding the total annual amount that the tenant paid in CAM and calculating the difference between what was paid and what is owed.
Let’s say a tenant paid all 12 months of CAM and it was $100 each month, so the total paid in was $1,200. Going back to our prior number the total annual CAM expenses for the landlord were $50,000. The tenant’s pro rata share of that would be $50,000 x 3.33%= $1,665, but they already paid $1,200 during the year, so the tenant owes the landlord $1,665 – $1,200= $465 for CAM.
It’s important to understand that in a perfect reconciliation with no unexpected expenses, the result should be zero. However, in practice, that will almost never be the case. Many services such as landscaping are contract services with a negotiated rate for the year, but items like snow removal, utilities or other variable expenses cannot be perfectly predicted.
Another factor to consider is that some leases base their estimated NNN reimbursements based on budgeted numbers, and some use the prior year’s actual numbers. There are positives and negatives to both ways of calculating the reconciliation, but you should know what your lease stipulates to understand your landlord’s calculations.
Once you receive your reconciliation invoice there are a few steps you should take to insure the accuracy of the billing and potentially save yourself money. If the management company is a large operation with many properties, your invoice could easily be one of thousands they send out, and they are subject to error.
First, verify that the amount the landlord is showing they received matches the amount of reimbursements you paid in for the year. If you’ve incurred late fees and had other billing issues this may be easier said than done, but it is so important.
Second, make sure that the pro rata shares they are showing match your pro rata shares as dictated by your lease.
Third, make sure that the arithmetic is correct in the equation of your pro rata share minus what you paid in.
Lastly, you need to verify the total expense amounts. Add up every number you are provided and make sure they tie in properly to each expense. Go online to your city or county tax site and make sure that the tax amount you were billed is correct for the current year. I’ve seen these steps result in hundreds or thousands of dollars of mistakes, make sure you are not one of them, because if you don’t then nobody else is going to.
By: Chris Burnett