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About Jim Avancena
Expertise
I am best qualified to answer any questions that involve commercial leases, the complexities and inter-relationships of the myriad provisions that a lease may contain, and explain how they commonly effect a landlord or tenant in their day-to-day business operation. I can explain most matters that will come up during of the full lease cycle from standard industry practices regarding the lease acquistion process, concerns related to remodeling/improving the leased premises, moving-in, subletting or assigning the leased space, and a long list of other problems that may come up during the lease term. I have practical experience with most property management issues and resolving landlord and tenant disputes. Note that I am not an attorney and cannot provide legal advice.
Experience
Twenty-eight years active experience in the commercial real estate industry as a licensed real estate broker in the Washington DC Metro area(DC, Northern Virginia & Maryland). I have been admitted (approved) by the Maryland and DC courts to testify as an expert witness on the subjects of Commercial Leasing and Property Management in the area of standard industry practices. I have had a business for the last 14 years advising virtually every form of business entity from large national corporations to the smallest ma & pa new businesses regarding a wide range of commercial real estate matters in addition to property management and commercial leasing.
Organizations
Currently my three children keep me so busy that it is difficult to find time to participate in organizations.
Publications
I publish a local commercial real estate newsletter titled: "Tenants First". My firm was the subject of a high profile Washington Post business section cover page (2.25 page)feature story on January 13, 1993; "Overcharging Overhead".
Education/Credentials
BA in Political Science from Memphis University, and five years of study in the real estate development summer program at MIT. I was certified as a commercial property manager (CPM-IREM), and currently hold a brokers license licensed in Maryland and the District of Columbia.
Awards and Honors
Routine, the same plaques and honors that most others in my industry have earned, none that are significant.
Past/Present Clients
Past clients include: The World Bank, George Washington University, National Association of Criminal Defense Attorneys, US Department of Commerce, The American Benefits Council, K-Mart Development, many law firms, a national union, other major organizations, and many, many small business firms and retail operators that I am most honored to serve. I estimate more than 1,500 firms/organizations.
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You are here: Experts > Real Estate > Commercial Real Estate > Commercial Real Estate Investment > CAM Calculation
Expert: Jim Avancena - 10/22/2009
Question
QUESTION: I started my commercial lease in 2007 and that's also the first year during which on 6/15/07 my landlord acquired the commercial property (office complex).
They calculate my 2008 CAM by comparing the difference in expenses between 2007 and 2008.
The issue is that when calculating the base year 2007 expenses, they prorate the expenses from 200 days (6/15/07 when they bought the property) to 365 days. However, since they are using a cash basis accounting method, the expenses are from much less days e.g. 120. In other words, the base year 2007 expenses are severely deflated and it in turn increase my 2008 CAM which again is a difference compared to the base year 2007 expenses.
How could I deal with my landowner now?
Could I request, for example:
1. they use accrual method for this calculation or
2. they prorate the 2007 expenses from a less number e.g. 120?
Thanks a lot in advance for your help.
Bill
ANSWER: Bill-
The complete answer to your question could be very long and extended; far to much to detail here. Let me give you the basic answer.
The CAM provision that you have in your lease should address the method of accounting to be used: i.e., cash basis or accrual basis, however it should also give some suggestion as to what happens when there is a base year that is a partial year, and some details regarding how the partial year expenses will be fairly adjusted. The partial year adjustments will be handled very much the same as a "gross-up" adjustment methodology; this is a similar process that makes theoretical adjustments (increases) in each line item operating cost to simulate what the operating costs would be if the building/property were 80% to 100% occupied instead of - for example - 50% occupied. Search "LEASE GROSS-UP PROVISION" on the internet and you will find 20 to 40 related articles explaining what I am talking about and the related methodology.
I would send formal notice (your lease should explain in detail how to give your landlord "Notice" of something - usually you must send correspondence via Certified Mail to the landlord at a specific address that will be specified in your lease) advising your landlord that you would like the landlord to provide you with a detailed written analysis of the 2007 Base Year expenses detailing the methodology they employed to adjust each component line item CAM cost from a partial year to a annualized value. For example, for the component line item CAM cost for trash removal, or parking lot maintenance, etc. what was the methodology they applied to go from the partial year cost from the date they took title to the property to create an annualized figure. This will show you how each CAM cost for 2007 was developed. If the rationale utilized by your landlord or his property management firm is reasonable then you can accept the 2007 base year total as the appropriate base year amount for the future. If the rationale seems flawed, or the landlord refuses to give you such information, you may have to take a different approach.
Your landlord or his/her property manager very likely have all the CAM expenses broken down and organized into what they call a "chart of accounts" that lists each expense item a classification number so the computer can easily add up all of the CAM costs by "account" code subtotal for each year, and then add all of the accounts that are considered CAM accounts to come up with the annual total of CAM costs. Your landlord will have a print out of this detailed CAM cost on a monthly and annualized basis. You can also ask the landlord for a copy of all of the CAM costs for 2007 and 2008 broken down by month and account. All of the numbers should add up to the ultimate figures on your CAM bill for 2007 and 2008.
The important thing is that both years of CAM costs need to have been subject to the same accounting methodology and accounting principles consistently. If some of the component CAM entries appear unusual for one reason or another, you may wish to ask your landlord or property to provide you with further detail in that regard, or request a review of that invoice and/or supporting documents.
Your lease likely addresses in writing what you can do regarding a review of your CAM expenses. It may say you have the right to audit the landlords records and the details about how that can be done. If your lease does not make any statement regarding what you may do if you wish to review the basis of the landlords CAM bill, then you have the right to request an accounting of your bill. Please look on the internet for the details/summary regarding the P.V. Properties v. Rock Creek Village Associates Limited Partnership, 77 Md. App. 77, 549 A.2d 403 (1988) Maryland Court of Appeals case. Simply enter: "P.V. Properties v. Rock Creek Village Associates" and you should have 5 to 15 entries to choose from.
Very generally, this case describes the responsibility that a landlord has to his tenants to provide them with information to check on the basis of the landlord's CAM bill.
Although your landlord may have made very accurate CAM cost adjustments to develop his Base Year and 2008 CAM expenses, it is very common for a property owner to have massive flaws in the way the CAM costs were determined. Often the base year calculation in CAM costs is artificially low to increase your charges for each lease year in the future. It is not an easy problem to resolve, however it will often be time well spent.
I hope that I have not given you too much information nor made your question even more complicated. Please send me a follow-up question if I can be of further assistance.
Good luck,
-Jim
---------- FOLLOW-UP ----------
QUESTION: Dear Jim,
Thank you for your quick and detail response.
Unfortunately,
1. the lease did not address the method of accounting to be used: cash or accrual
2. it did not address what happens when the base year is a partial year and how partial year expenses are fairly adjusted
3. it did specify clearly the methodology of gross-up when occupancy is below certain percentage which I understand and think it’s fair for a year-to-year comparison. I don’t have any issue with this gross-up.
I did exercise my right as a tenant, as provided in the lease, to conduct an audit of the 2007 and 2008 expenses although I did not hire any auditor but request the CAM calculation and detail expense ledger through email. And that’s how I found out why there was a big increase (almost 40%) from 2007 to 2008.
So, from the audit result, it’s confirmed that they are using the cash accounting method consistently for both 2007 and 2008. Again, the problem I think was the rationale to come up with the full year expense for 2007. For example, there is this association fee item of $11113 for 2007 and they assume it’s for 200 days (since 6/15/07 when they acquire the building) and prorate it into a full year for $20281 ($11113 * 365/200). However, on close examining of the actual expense, because of the cash accounting method, this only pays for 4 months (120 days) of association fee and so the full year proration should be $33800 ($11113 * 365/120). In other words, they deflate the 2007 base number significantly so as to charge a higher 2008 CAM fee which again is a difference to 2007. That’s a big difference of almost 70%.
Would you agree this is a massive flaw in their calculation?
My lease started in 2007 when the economy was good. I am now paying a descent rent of $3.1 and now the CAM expense is another $0.4! (This is not a type A building) Just like everyone else, we are struggling in this economy but still hold up to be good tenants to pay our rent on time but we think the way they charge us for this CAM is not fair. As mentioned before, this was not disclosed in the lease.
I already raised this issue with the landlord and their response was that “cash accounting basis is the industry standard for CAM expenses”.
But does cash basis accounting dictate the manner how partial year expense was adjusted to a full year?
If they insist on this way of calculation, what’s the approach that I should take with the landlord? Could I bring this up with the small claim court and/or use this as a ground for breaking the lease?
Regards,
Bill
Answer
Bill:
You confirmed that the landlord uses a cash accounting method. Landlords have often manipulated their accounting records on the cash basis of accounting to maximize the income they can squeeze out of their tenant(s) based on the CAM reimbursement provisions in a lease. A landlord simply manipulates the amount of CAM expenses that are paid (usually by deferral of expense(s) to the next accounting period) or theoretically adjusts a partial year of CAM expenses (In your case, it is the Base year) in such a way that the base year CAM costs are understated, and the comparison years of CAM expenses that follow are fully calculated or over stated.
Cash basis accounting does not mean you can compare apples to oranges and manipulate payment practices for your own gain. If your attorney explained your CAM lease terms to a judge in court, confirming that the landlord has complete control over when and which CAM expenses payments are made, and then detailed these accounting "shenanigans" (the kindest word that is appropriate), I am confident that the judge would have a short and direct ruling on this landlord's bookkeeping practices.
My answer to your question then is: Yes, this is a massive "flaw" in the landlord's calculation.
Cash basis accounting, similar to any other basis of accounting, dictates that a partial year of expenses must be converted to an annualized (full year) basis on a reasonable and balanced basis. The landlord's adjustments cannot be capricious, and self-serving.
I suggest that you do a complete review each individual CAM expense for the base year and the 2008 comparison year expenses; being certain to review every invoice and it's details, the associated purchase order, work order or contract, and the date of each payment(check) and the bank's cancellation date on the payment - for both years. Determine if there are any inconsistencies in those vouchers - especially regarding dates - and establish the methodology utilized by the landlord to equitably adjust the 2007 base year costs to annualized values.
After you have completely finished that audit process, and depending upon the discovery of other questionable practices, I would then formally write to your landlord and advise it of "inconsistencies" you have discovered from the audit. Be general and describe the errors you discover, however, if possible, do not indicate the specifics of your findings because you do not want to give your landlord a chance to manufacture a response to your findings before you go to small claims court. If you discover substantial errors in the CAM expense assessments, keep in mind that civil or criminal court is extremely expensive and time consuming.
Unless your lease specifically forbids you from talking with other tenants in the property about the CAM expenses, you might also consider discussing your CAM expense experience with other tenant's in the same property and compare leases, CAM billings, and the interactions the other tenant's have had with the landlord in these regards. You may discover helpful information by talking with other tenants in the same property.
Please let me know of any further questions you may have.
Good luck,
-Jim
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