Polling Landlords & Property Managers on CAM

21 Replies

Fellow BP members who are commercial landlords & PM: Out of 100 tenants, how many of your tenants would pay the adjustable CAM at the end of the year? Any strategies to share? Thanks! 

Hi Robert,

On the retail side you have the fixed base rent in the lease and then CAM per sq ft the retailer pays an estimated amount every month.

End of the year audit shows if the tenant overpaid by a few hundred or underpaid etc.

If the tenant does not pay the additional CAM shown from the audit year end they would be in violation of the lease.

Originally posted by @Joel Owens :

Hi Robert,

On the retail side you have the fixed base rent in the lease and then CAM per sq ft the retailer pays an estimated amount every month.

End of the year audit shows if the tenant overpaid by a few hundred or underpaid etc.

If the tenant does not pay the additional CAM shown from the audit year end they would be in violation of the lease.

 I agree with Joel. In SoCal this is also typical for modified gross office leases and net leases. Tenants pay their share 1/12 estimated annual expenses each month. Reconciliation happens by April of the subsequent year typically.

Josh

They should all pay. If they don't, they are in default of the lease. Do you have concerns with the end of the yer coming up?

A few things to note:

1. Unless you're dealing with larger national or corporate tenants, there is a pretty good chance the Tenants will need a lot of hand holding as you explain the reconciliation process and any monies owed, etc. be prepared for a pushback, especially if they owe money.

2. if the property is well managed, the reconciliation should be a breeze and most Tenants should not owe or receive credits of more than a few hundred dollars. Budgeting and completely understanding all facets of a Tenants lease are important steps to preparing an accurate estimate each year.

3. If you deal with a larger or national Tenant, be prepared for an occasional 3rd party audit (if allowed under the lease). Keep good records and make sure all invoices are billed correctly and have clear descriptions and locations of all services. If you are audited, and they find large discrepancies, the Tenant will expect answers and an immediate credit, and in some circumstances make the Landlord pay for the audit. Not to mention subject further CAM billings to additional scrutiny. 

CAM reconciliations can be difficult for both Landlords and Tenants at times. A small 10,000 SF single use NNN property would be very simple, whereas a large class A 1,000,000 SF multi-tenant high rise tower would be quite complex.

Originally posted by @Mike Giudici :

They should all pay. If they don't, they are in default of the lease. Do you have concerns with the end of the yer coming up?

A few things to note:

1. Unless you're dealing with larger national or corporate tenants, there is a pretty good chance the Tenants will need a lot of hand holding as you explain the reconciliation process and any monies owed, etc. be prepared for a pushback, especially if they owe money.

2. if the property is well managed, the reconciliation should be a breeze and most Tenants should not owe or receive credits of more than a few hundred dollars. Budgeting and completely understanding all facets of a Tenants lease are important steps to preparing an accurate estimate each year.

3. If you deal with a larger or national Tenant, be prepared for an occasional 3rd party audit (if allowed under the lease). Keep good records and make sure all invoices are billed correctly and have clear descriptions and locations of all services. If you are audited, and they find large discrepancies, the Tenant will expect answers and an immediate credit, and in some circumstances make the Landlord pay for the audit. Not to mention subject further CAM billings to additional scrutiny. 

CAM reconciliations can be difficult for both Landlords and Tenants at times. A small 10,000 SF single use NNN property would be very simple, whereas a large class A 1,000,000 SF multi-tenant high rise tower would be quite complex.

Mike:

1. What an excellent answer! You are right with the hand holding for the reconcilliation process. Many tenants don't actually read the lease, even if we explained carefully from the start that the rent consists of 2 parts. 

2. Here in Texas, the biggest unpredictable for CAM is property taxes  (approx. 3% of market value) and while we protest using our consultants each year, the reality is that it can sometimes go up 2-3 times . We keep a close eye on the other expenses including shopping for insurance each year.

3. Yes, dealing with some national Tenants can be a headache, with some acting as bullies at times! Recently, and rather paradoxically; we had to drop a national tenant as a prospective as they were insisting on gross rents, no CAM and wanting us to insure them as additional insured (not the other way around) LOL. If you want to know which company, I can P.M. you.

SO, each year how percent of your tenants refuse to reconcile their CAM? Thanks!!!

Robert

Originally posted by @Joel Owens :

Hi Robert,

On the retail side you have the fixed base rent in the lease and then CAM per sq ft the retailer pays an estimated amount every month.

End of the year audit shows if the tenant overpaid by a few hundred or underpaid etc.

If the tenant does not pay the additional CAM shown from the audit year end they would be in violation of the lease.

Hi Joel:

Always words of wisdom from you! While they default on CAM, recourse is sometimes difficult. How many percent of your tenants would you say refuse to reconcile their CAM differences each year? 

Robert

Originally posted by @Joshua Leite :
Originally posted by @Joel Owens:

Hi Robert,

On the retail side you have the fixed base rent in the lease and then CAM per sq ft the retailer pays an estimated amount every month.

End of the year audit shows if the tenant overpaid by a few hundred or underpaid etc.

If the tenant does not pay the additional CAM shown from the audit year end they would be in violation of the lease.

 I agree with Joel. In SoCal this is also typical for modified gross office leases and net leases. Tenants pay their share 1/12 estimated annual expenses each month. Reconciliation happens by April of the subsequent year typically.

Josh

 Hi Josh:

So, approximately how many percent of your tenants do not reconcile the difference? Usually, it appears to be shortfalls as taxes, insurance and utilities keep going up rather than come down.

Robert

Originally posted by @Robert T. :
Originally posted by @Joshua Leite:
Originally posted by @Joel Owens:

Hi Robert,

On the retail side you have the fixed base rent in the lease and then CAM per sq ft the retailer pays an estimated amount every month.

End of the year audit shows if the tenant overpaid by a few hundred or underpaid etc.

If the tenant does not pay the additional CAM shown from the audit year end they would be in violation of the lease.

 I agree with Joel. In SoCal this is also typical for modified gross office leases and net leases. Tenants pay their share 1/12 estimated annual expenses each month. Reconciliation happens by April of the subsequent year typically.

Josh

 Hi Josh:

So, approximately how many percent of your tenants do not reconcile the difference? Usually, it appears to be shortfalls as taxes, insurance and utilities keep going up rather than come down.

Robert

 I've only had a handful that didn't pay their shortfall and they typically went bankrupt or left the building due to nonpayment of rent. Less than 5 out of 100 on average.

Very few tenants fail to pay the shortfall, especially if it's reasonable and legitimate. Mom and Pop Tenants will be the most likely to give you problems and you'll have to deal with these guys one on one, situation by situation. As you mentioned above, favorable recourse can be difficult.

While predicting exact increases for taxes, insurance and utilities can be difficult, it can be done with a reasonable level of accuracy. 

It's good to hear you regularly petition your taxes and shop insurance annually. Have you tried looking into capital type projects that will help reduce energy consumption (LED light fixtures for example)? Depending on the lease, sometimes you can pass these "energy saving" capital improvements through to the Tenants. These types of improvements can also be subsidized in whole or part by utility companies and can be eligable for federal tax credits/deductions.

The leases are enforced so all tenants end up paying eventually.  If it's a balance the tenant can't pay in one shot we would allow them to pay in installments.  

During the crisis in 2008, some tenants were just barely making it and some magnanimous landlords agreed to waive any reconciled balance due.

Sometimes if the tenant is doing bad or a concept is going under  the landlord will offer a settlement to break the primary term of the lease.

One of my clients had a coffee shop go out while we were in the process of buying it. 

The settlement and mutual release of lease obligation was about 40k. Although total remaining lease value was 100k it was better to take the  money now and use the 40k for leasing commissions, a few months lost rent on the space, and tenant improvements for the new tenant.

If the former tenant was pushed too much on the buyout they might eventually file bankruptcy and the landlord gets much less and waits longer for the money.  

Originally posted by @Dale Shin :

The leases are enforced so all tenants end up paying eventually.  If it's a balance the tenant can't pay in one shot we would allow them to pay in installments.  

During the crisis in 2008, some tenants were just barely making it and some magnanimous landlords agreed to waive any reconciled balance due.

 Dale:

Thanks for the advice. Will have to ask our team to follow through with the payments. Will update. We tried to absorb CAM in the past, but the property taxes have sky rocketed. Greedy City coffers over here. 

Hi Robert,

Yes I know Texas very well.

They like to tax to death because they have no income tax. Multifamily the landlord is eating skyrocketing taxes.

With retail at least the tenants cover it. High CAM costs do put pressure on the tenants ability to pay increases in base rent. Usually the property owner gets a tax attorney and takes on the county or cities new assessment. The result is generally a reduction of the newer current assessed value the city or county is trying to jack up but not as low as the assessed value in the downturn. It takes awhile for the appeal process to go through and finish.  We have the same in GA for property assessments trying to go up in taxes. The county and cities try the sham of telling unsuspecting owners that if your property is assessed higher it is worth more. The tax value has nothing to do with market value although higher CAM costs compared to other surrounding retail strip centers can affect resale value.  

These cities and counties were hurting in a down market and bleeding cash. Now they are trying to inflate values to bring in revenue to to get their books to a neutral or even positive position. Everyone is fighting to keep their dollars and it will always be that way.    

Originally posted by @Joel Owens :

Hi Robert,

Yes I know Texas very well.

They like to tax to death because they have no income tax. Multifamily the landlord is eating skyrocketing taxes.

With retail at least the tenants cover it. High CAM costs do put pressure on the tenants ability to pay increases in base rent. Usually the property owner gets a tax attorney and takes on the county or cities new assessment. The result is generally a reduction of the newer current assessed value the city or county is trying to jack up but not as low as the assessed value in the downturn. It takes awhile for the appeal process to go through and finish.  We have the same in GA for property assessments trying to go up in taxes. The county and cities try the sham of telling unsuspecting owners that if your property is assessed higher it is worth more. The tax value has nothing to do with market value although higher CAM costs compared to other surrounding retail strip centers can affect resale value.  

These cities and counties were hurting in a down market and bleeding cash. Now they are trying to inflate values to bring in revenue to to get their books to a neutral or even positive position. Everyone is fighting to keep their dollars and it will always be that way.    

Yes, one of my partners decided to file suit against the County when the tax protest did not work. I think this discussion does highlight to the general audience reading this about the complexities of investing in commercial real estate and managing CAM is one of them. If you have vacancies, taxes can eat you up in some states!

We deal almost exclusively with mom & pop / small office tenants and at times it does require a LOT of hand holding. Despite always reviewing new leases in fairly minute detail, I'm always amazed how many tenants do not know what they are signing and don't even keep a copy handy. They are always asking us to give them another copy of their signed lease if they need to check something.

One unique aspect to owning in Toronto is that we get a partial property tax refund for any space vacant longer then 3 months. It works out to ~30% of the vacant spaces share of taxes. We have been fortunate that vacancy at our property for many years has been very low so not that big a deal but it only requires a bit of form filling and there is no reason not to claim any refund that is allowed.

Oren: Although mom & pops need a lot of hand holding; I sometimes prefer mom & pop. Some of the corporate tenants can be big buillies for landlords! The taxation relief for empty spaces in Canada is wonderful for investors, not so here in Texas. Sigh. 

Originally posted by @Robert T. :

Oren: Although mom & pops need a lot of hand holding; I sometimes prefer mom & pop. Some of the corporate tenants can be big buillies for landlords! The taxation relief for empty spaces in Canada is wonderful for investors, not so here in Texas. Sigh. 

 Robert,

That taxation relief is not a Canada-wide phenomenon... maybe not even an Ontario-wide practice. 

Oren: Is this rebate, TO refunding from the municipal portion of the property tax?

Originally posted by @Mike Giudici :

Very few tenants fail to pay the shortfall, especially if it's reasonable and legitimate. Mom and Pop Tenants will be the most likely to give you problems and you'll have to deal with these guys one on one, situation by situation. As you mentioned above, favorable recourse can be difficult.

While predicting exact increases for taxes, insurance and utilities can be difficult, it can be done with a reasonable level of accuracy. 

It's good to hear you regularly petition your taxes and shop insurance annually. Have you tried looking into capital type projects that will help reduce energy consumption (LED light fixtures for example)? Depending on the lease, sometimes you can pass these "energy saving" capital improvements through to the Tenants. These types of improvements can also be subsidized in whole or part by utility companies and can be eligable for federal tax credits/deductions.

For those that want to be CRE investors, you really have to be hands on to do well. What I mean is visit your properties regularly and look for fiscal leaks i.e. lights turning on in the day time, water leaks, pot holes (liability issues, structural issues ) etc. We see such problems in many centers that are not run well. Otherwise, you need to hire trustworthy and responsible property managers.

Originally posted by @Mike Giudici :

I agree. An absentee owner without a strong Property Manager is never going to realize the full potential of his/her investment.

 For those interested in buy & hold; the key to success in property investing is doubtlessly good property management. This is not usually taught at investment courses as it may not be as glamorous as how to get rich quick etc.