SAN FRANCISCO–When property managers convene here later this month for IREM’s (Institute of Real Estate Management) annual Global Summit, they’ll hear about something most believe they already know…common area maintenance (CAM) or operating expenses. They might be surprised.
Session presenter Colleen Nemeth, CPM, CSM, says there are enough hidden traps in reconciliations to keep managers on their toes, and enough benefits to doing it right to keep everyone happy – property owner, manager, and tenant. “Some of those expenses can be shared, let’s say in a shopping center; the landscaping, parking lot, entrances, drives. And there are other expenses that are exclusive to certain tenants,” such as the trash collection in a net-leased Starbucks on that same site.
Knowing the details of every lease is critical to reconciliation, she says, knowing who is responsible for what and to what degree. To that end, the session will benefit newcomers to the industry as well as seasoned pros, especially those who are changing positions.
“If you work mainly in the industrial sector, you may not know what’s going on with the office or retail space,” says Nemeth, who is director of Real Estate at Spectrum Property Management in San Diego. “But then you change jobs and your next position could entail a retail project.”
Therefore, she says, “It’s important to get it as close to right the first time. If there’s a big mistake, it can affect the rest of the tenants. If an expense isn’t categorized in the proper CAM pool, it could mean you have to fix everyone’s bill.” Which results not only in the headache of re-billing everyone, but probably more important, the “tenants losing confidence in you.”
The flip side, of course, is being able to go to your client with found capital. Plus, “It’s really fun when you get within a couple of hundred bucks,” she says.
So what are some of the pitfalls to getting it right? First comes the intricacies of the above-mentioned CAM pools – the group of tenants in a retail or office setting that are paying a pro-rata cost – and carving out those “unusual situations,” such as the Starbucks’ awning. Starbucks is solely responsible for their awning. “So, you set up a pool based on those who pay for everything, and exclude those special cases.” Even so, it’s incumbent upon the manager to know the formulas for pooled costs, which can differ from property type to property type.
Another major pitfall is lease-dictated deadlines, especially since not all leases are alike. “Some might provide for a reconciliation deadline of 120 days after the calendar year,” she says. “If you miss that deadline, you eat the charges. But some leases are worded without that provision. Knowing the details of the lease can help you avoid going back to your client with bad news.”
Dealing with formulas, pools and exceptions might seem headache-inducing, but getting it wrong is worse. Still, it’s a far cry from the days when, “Managers didn’t drill down on expenses and just billed a pro-rata share of everything to everyone.” Nemeth says. “And the landlord would have to eat the expense for some tenants because they weren’t thinking about changing the pro-rata share.”
She cites examples of water charges when there’s vacant space on site: “If you have a lot of vacancies, you should bill for water differently. Today, managers are setting up to maximize their recapture.”
The result is more than just cementing the confidence of your tenants. It also reflects on the trust of your property owners, and, ultimately, “The very value of the property.”