How Commercial Real Estate Landlords Lose Money to Faulty Expense Calculations

Faulty expense reports are costing commercial property owners hundreds of thousands of dollars every year and the problem seems to be getting worse. The problem is created by tenants, who either don’t know how to correctly fill out expense reconciliations or submit the forms without fully completing them. The problem is multiplied, when there are several tenants under a single roof.

Tenants Expectations – CAM Reconciliations

Tenants are expected to file common area maintenance and other reconciliations, or CAM recs, to report their expenses. When just one single tenant files the form incorrectly, it can cost the commercial property owner a five-digit yearly loss. If the landlord owns a shopping center, for instance, and several tenants file their CAM recs incorrectly, that figure can quickly mount. Now, imagine the effect for a commercial property owner overseeing multiple shopping centers, or business parks. Those costs can quickly reach staggering amounts.
Additionally, a mistake that goes uncorrected can continue to increase the cost to the landlord. A single misreported CAM rec can interfere with future property transactions, complicating the landlord-tenant relationship.
The tenant isn’t entirely at fault, however. In many cases, the landlord is often at fault for failing to complete the orders in a timely manner. This can be attributed to the high labor cost, or to the fact that many service requests involve a significant investment of time. For property managers already dealing with a full schedule, this process can become an overwhelming burden.
The situation is further complicated by the fact that CAM recs are usually submitted, during the spring tax season. This necessitates long work hours for real estate teams, who must verify expense calculations and review caps and modifications. These duties are piled onto their routine responsibilities, compelling personnel to work hours of overtime or fall behind. In most cases, the latter is the case and teams can fall several years behind on reviewing the CAM recs for each property.
Another problem arises when real estate teams catch up on the reports. After evaluating their records, they may ask retailers to return enormous amounts of money. This creates more tension between tenants and property managers, making the situation even more complicated.
Finally, teams must act quickly to catch up in some cases, because there are time limitations assigned to CAM recs. If that statute of limitations expires, the property owner will have to take the loss. This is where the landlord ends up losing those hundreds of thousands of dollars. If the error is in favor of tenants, landlords must offer rent credits to the tenants, which disrupts the budget on that property.
The failure to keep current on CAM recs creates a downward spiral of errors that can continue to mount the losses for property managers. Even in instances where a tenant receives a temporary rent reduction, backed up filings can cause the property manager to forget to restore that tenant’s regular rental rate. The tenant may go years paying the discounted rate, which should only have lasted for a few months. Erroneous lease rates are common in these situations, because smaller tenants often pay a rental rate that’s based on the rates paid by larger tenants. One tenant paying an incorrect amount can affect what every tenant pays, resulting in a cascade effect that can cost even more in losses.