CAM reconciliation: the steps, in order, for NNN landlords

CAM reconciliation is the yearly (or sometimes quarterly) exercise where a commercial landlord compares what each tenant paid in monthly estimates against what the common area maintenance actually cost, then bills or credits the difference. It is also called the CAM true-up, the operating expense reconciliation or the CAM rec. On a triple net (NNN) lease, the same exercise usually covers real estate taxes and insurance.

The idea is simple. The work is not, because every lease at a property can say something slightly different. This guide lays out the steps in the order that keeps the numbers straight, so you can do them in a spreadsheet, hand them to a bookkeeper or check someone else's work.

What you need before you start

Gather three things for each property:

• The general ledger detail for the reconciliation year. Every expense line, with its account, date, vendor and amount. Not the trial balance: you need to see the lines, because some will need to be pulled out.
• The rent roll. Each tenant's suite, square feet, lease start and end dates, and what you billed per month for CAM, taxes and insurance.
• Each lease's CAM clause. The share, what is recoverable, what is excluded, any cap, any gross-up, any administrative fee, and whether there is a base year.

If one of these is missing, stop there. A reconciliation built on a guess about a lease clause produces a wrong bill, and a wrong bill to a tenant is the most expensive kind of error in this exercise.

Step 1: sort the ledger into pools

Group the expense accounts into pools. A common set is:

1. Controllable CAM: landscaping, parking lot sweeping, trash, repairs, management fee.
2. Non-controllable CAM: utilities, snow removal and similar costs your lease treats as outside your control.
3. Real estate taxes.
4. Insurance.
5. Not recoverable: mortgage interest, depreciation, anything your leases do not pass through.

The split between controllable and non-controllable matters because many leases cap only the controllable pool. Check that the pool totals add back to the ledger total, less the not-recoverable accounts. If they do not, a line went missing or was counted twice.

Step 2: work out each tenant's share

The most common method divides the tenant's square feet by the property's gross leasable area. A 2,000 sq ft suite in a 40,000 sq ft center has a 5.0% share. Some leases state a fixed percentage instead, and some state their own denominator, which may not match the building's real area. The lease controls. Use what it says.

If a tenant was in place for only part of the year, multiply by the fraction of the year the lease was in effect, counted in days. A tenant who moved in on April 1 was there for 275 of 365 days.

Step 3: apply the lease's exceptions

This is where reconciliations go wrong, because the exceptions differ from lease to lease, even at the same property. In the order that tends to work:

• Exclusions. Remove the accounts this lease says the tenant does not pay, for example a roof repair that one lease treats as the landlord's cost.
• Gross-up. Some leases let the landlord adjust variable expenses, such as utilities and trash, up to what they would have cost at a stated occupancy level, often 95%, when the property was emptier than that. The adjustment only ever goes up to the stated level. Read the clause for which accounts count as variable.
• Base year or expense stop. On many office leases the tenant pays only the increase over a base year amount, or over a stated stop per square foot.
• Cap. A cap limits how fast the controllable charges can grow. A non-cumulative cap limits each year to the prior year's amount plus the stated percentage. A cumulative cap lets unused room carry forward, either added up simply or compounded. Which one applies is a matter of the exact wording, so read it.
• Administrative fee. A percentage added on top, on a base the lease names. The lease also says whether the fee sits inside the cap or outside it.

Apply the steps in a consistent order and write the order down. Two people applying a cap and a gross-up in a different order will get different answers.

Step 4: true up against the estimates

Add the tenant's share of each pool, with the exceptions applied, to get the total due for the year. Subtract what you actually billed in estimates over the same period. A positive result is a balance due from the tenant. A negative result is a credit to them. If the tenant paid irregular amounts during the year, use what was billed, not the monthly figure on the rent roll.

Step 5: check the numbers before anyone else sees them

Before a letter goes out, run through these checks:

• Do the pool totals reconcile to the ledger?
• Do all tenants' shares add up to no more than 100%, with the difference being vacant space the landlord absorbs?
• Does any tenant's year-over-year change look strange? A large jump usually means a mis-coded ledger line or a one-time repair that should have been excluded.
• Did anyone with a cap or exclusion get billed as if they had none?

The "decimal error from January" story that property accountants tell is real: one wrong line early in the year throws off every share after it. Reconcile the pool totals first, and the rest becomes easier to trust.

Step 6: write the letter and keep the backup

Each tenant gets a statement showing the period, the share and how it was found, each pool's total and their share of it, any cap or exclusion applied, the administrative fee, estimates billed, and the balance due or credit. Keep the backup (the ledger detail by pool and the calculation) because tenants may ask for it and many leases give them the right to audit. How long you must keep records and how much notice a lease requires for the statement vary by lease and by state, so check your own.

Where the time goes, and what can be automated

Most of the hours go into rebuilding the same workbook every year: re-sorting accounts, re-entering each lease's terms, and re-checking arithmetic. The terms and the account-to-pool assignments do not change much from year to year, so they are worth capturing once.

That is the job CAM Rec does. You upload the year's general ledger export and the rent roll, assign each account to a pool once, enter each lease's terms once, and it works out every tenant's true-up, showing each calculation line. You approve the numbers, then it produces a letter PDF per tenant and a backup package. It does not send anything to tenants and it does not interpret your leases: it does arithmetic on the terms you confirm.

For the arithmetic worked on one tenant, see the CAM reconciliation example; for the first step of every bill, see pro rata share calculation; and for office leases with a base year, see operating expense reconciliation. The letter itself is covered in the CAM reconciliation letter guide.

This guide is general information, not legal or accounting advice. Your leases and your state's rules govern what you may bill.