OpEx and Common Area Maintenance simplified

If you had to guess how much money is lost due to OpEx and CAM inefficiencies in a year, what number would you throw out? Thousands? Tens of thousands?

For some enterprise companies, the answer is hundreds of thousands or even millions!

These inefficiencies must be addressed, and there are two ways to do it:

• Learn as much as possible about the task at hand to make sure you address it in the right way.
• Make sure you are using the best and most efficient tool for the job.

First, let’s make sure we’re all on the same page.

"The best practice is to stay on top of OpEx reconciliations and audits all along."

Matt Waters, CPA

Director of Lease Accounting & Sustainability, CoStar Real

Matt Waters, CPA

Understanding OpEx and CAM terms

One of the most intricate areas of lease administration and accounting involves operating expenses (OpEx) and common area maintenance expenses (CAM). Let’s start with key terms and strategies associated with both, then explore how software can help reduce associated waste and inefficiency.

OpEx stands for operating expenses and refers to all the expenses associated with a leased property besides rent. These expenses can include taxes, insurance, utilities, repairs, maintenance and administrative expenses.

CAM stands for common area maintenance, which is a type of operating expense. CAM expenses relate to maintaining the common areas that are shared by all tenants. Examples include landscaping, cleaning, repairs, security, snow removal and fees paid to property managers.

Because OpEx is the broader term, the rest of this article will use OpEx to refer to both OpEx and CAM.

Pro Rata Share is the term used to describe each tenant’s portion of OpEx. This is generally based on the square footage each tenant occupies relative to the whole property.

Expense Pool is used to describe the total amount of OpEx that the landlord accumulates over a set period. This total is generally then allocated to tenants based on their pro rata share.

Gross Up might be allowed per the lease contract; in which case the landlord is allowed to add a percentage to the tenant’s pro rata share.

Admin Fees might be allowed per the lease contract; in which case the landlord is allowed to add a fee to the tenant’s pro rata share.

Base Year is a year that other expenses are compared to for the purpose of putting a cap on how much OpEx can increase year over year and over time.

Percentage Cap sets the maximum amount that can be charged for each year by applying a percentage to the prior year’s amount.

Cumulative Cap sets a maximum amount that can be charged for each year by applying a percentage to the base year and then each subsequent year. This may be represented in a lease table exhibit.

Escrowed Charges are paid throughout the year to the landlord from the tenant and represent estimated OpEx. The estimate might be based on last year’s actual charges or another agreed-upon method.

Reconciliation typically occurs on an annual basis and involves comparing the escrowed charges to the pro rata share resulting in an additional amount due the landlord or a refund.

Audit is an action that can be taken by the tenant under some leases. An audit involves reviewing landlord records to understand the total expense pool, pro rata share and gross-up or admin charges.

Notice Dates are important for both the tenant and the landlord because each lease may have specific time limits on when statements, charges, reconciliations, or audit requests are due.

There are many moving pieces associated with OpEx, and unfortunately, each lease can be different. Tenants forfeit millions of dollars each year by relying solely on landlord invoices. I know this because there are entire consulting practices built around recovering this money from landlords. I interviewed one of the most respected lease audit experts, Al Stabile, on season 1 of The Lease Alert podcast.

The Lease Alert podcast

Matt Waters connects with a lease audit expert

The Lease Alert podcast

Engaging with one of these consultants is a good idea especially if it has been a while since your company took a deep dive into OpEx.

OpEx savings in the real world

While consultants can make a major difference, the best practice is to stay on top of OpEx reconciliations and audits all along. That’s where technology can help.

Advanced lease management features like the OpEx audit tool in CoStar Real Estate Manager track or calculate all the key data points discussed in this article and more on a lease-by-lease basis. On top of that, they make it easy to get information in and out with validated upload templates, standard industry-leading reports and ad-hoc reporting capabilities.

This makes a particularly important difference to retail lease administration.

So make sure your lease management platform has the features and functionality you need to address these pesky and costly inefficiencies.