Budgeting for lease expenses is a critical task. Though it needs to be done only annually, i.e., once a year, it cannot be taken lightly and is also quite time consuming. Especially if you have a large lease portfolio. Budgeting is nothing but estimating the costs you will incur during a set time period. From a tenant’s perspective, CAM budgeting refers to the process of estimating the common area maintenance costs (CAM charges) that you will be incurring during the financial year. Budgeting helps you plan ahead for your expenses so you are not caught unprepared when they are due. However for budgeting to really serve its purpose, it has be accurate and as close to the actual amount as possible. This blog provides a step-by-step guide to budgeting that will help you budget for your CAM expenses efficiently and accurately.
The first step in budgeting for CAM is to identify how CAM charges are calculated and levied as per your lease agreement. Make list of chargeable items under the CAM header. Some common CAM expenses include common area utilities, elevator maintenance, parking lot maintenance, centralized HVAC charges, snow removal expenses, etc. The elements included in the CAM header vary from lease to lease.
The second step is to make a list of items that are not a part of your CAM charges. This is important because, as a tenant if you are paying the service provider directly for the services you use, then those shouldn’t be a part of your CAM calculations. For example, if you are paying your utility charges directly to the utility company or you pay the snow and trash removal companies directly for the services you utilize, then these charges shouldn’t find their way into your CAM expense. You will still need to budget for them, though, because it ensures you are prepared for these expenses. But, they are not a part of your CAM budget.
The third step is to look at the CAM expense trend in the preceding years so you can arrive at an estimated expense amount. Another exercise to perform at this stage would be peruse invoices pertaining to the previous year and using that as a base for the upcoming year’s budgeting. At this stage you might also want to look at what the variance has been historically when comparing the actual CAM charges with the budgeted amount for the last few years. Is there a significant difference between the two? If so, then where? Try to identify specific CAM headers where there is significant difference in the budgeted vs. actual expense, so you can estimate more accurately for the upcoming year.
The fourth step is to understand your CAM calculations as per the lease. How does the landlord determine how much you owe them in CAM? Usually, CAM charges are divided amongst all the tenants based on their pro-rata share. Pro-rata share calculations are the cornerstone of CAM charges computation. Ensure you understand the pro-rata computation specified in your lease and calculate it accurately when budgeting for CAM expenses. Also check if there are any caps on the CAM expenses that your lease specifies. Caps force landlords to limit CAM expenses to a certain pre-approved threshold, which is usually a percentage of the previous/base year’s expenses. Understanding your CAM computation method and caps will help you budget more accurately.
Factor in the unexpected
In this post-pandemic world, it makes sense to factor for any unexpected events that may cause a significant dent in your budget. When it comes to CAM budgets, you need to consider occupancy fluctuations and how it may affect your CAM expense as per your lease agreement. Occupancy is a key factor affecting the pro-rata share of tenants when it comes to CAM charges. Depending on the gross-up terms and conditions agreed upon between the landlord and the tenants, the tenant’s pro-rata share of CAM expenses will vary if the occupancy rate of the premises fluctuates. In order to ensure your CAM budgeting covers such eventualities, take into consideration any changes in occupancy rate including move-ins, move-outs, expansions, contractions, etc. that may occur in the foreseeable future.
Budgeting for CAM takes time and effort, and needs to be done diligently every year, on time. It makes sense to enlist the support of an experienced lease accounting and administration services provider. Especially when you have a large lease portfolio with hundreds or thousands of leases spread across the country. An lease administration vendor who specializes in CAM reconciliations and budgeting will add a lot of value to your budgeting process through their expertise, industry knowledge and experience.