The Importance of the Common Area Maintenance Audit
By: Kevin Barry, CPA
Business owners are tasked with many responsibilities, from increasing sales to managing expenses, and they bear a lot of an operation’s burden. It is no surprise that things get overlooked, and one of those often-overlooked areas is a common clause found in leases of business space. I am referring to common area maintenance (CAM) charges, common within a business lease. CAM charges are the tenants’ share of expenses for the areas common to all the tenants in a building, such as the lobby, bathrooms, elevators, landscaping and parking lot. These charges are paid to the landlord by each tenant.
To calculate a tenant’s share of CAM expenses, the tenant’s square footage is divided by the entire square footage of the building. This result is then multiplied by the total amount of the CAM charges and usually billed on a monthly basis. These charges can be a significant part of a business’s operating expenses and therefore, is important that they are monitored.
Normally, the landlord will provide a summary of what is included as part of the calculation to determine the expenses. It is then on the business owner to determine if the expenses are reasonable, which in many cases will result in the owner retaining an accounting firm to review the terms of the lease as part of an audit of the CAM expenses. The accounting firm will approach the landlord and request to see the support they used to determine the CAM charge calculation. During this process, the accounting firm will ensure that only expenses for the common areas of the building are included, often catching errors such as repairs that were made for a specific tenant but for not the common area. In addition, the accountants will look for additional expenses from the landlord’s business (such as legal and accounting fees, for example) that do not belong in the calculation based on the terms of the lease.
An audit of CAM expenses can also benefit the landlord. Often, there are instances when the managing agent of the building is billing out a lower amount than they should because they are using outdated lease terms, or perhaps not including all the eligible expenses. Moreover, an accounting firm’s audit might help the building owner by examining the leases of every tenant in the building to check that the square footage used in the calculation is correct and that all of the eligible expenses are included.
Owner, landlord or tenant – a CAM audit can be of real value.