Lease audits and CAM audits are important but very different functions in the process of lease portfolio management.
Both lease audits and CAM audits are important functions in the process of lease portfolio management. Though used interchangeably sometimes, they actually refer to two different lease administration services. This blog discusses the difference between the two terms. Let’s begin by defining both of them.
The term "lease audit" refers to auditing of a lease abstract in the light of the original lease documents. Lease audits are usually performed when landlords or tenants already have the leases abstracted but wish to verify the accuracy of the lease abstracts. Some reasons for choosing to have a lease audit done could be for the following reasons.
One reason is that the lease abstracts are outdated. If the leases were amended or any addenda were made to them at a later date, you would want to ensure that the lease abstracts reflect the most recent information, which won’t be the case if the lease abstraction was done before the amendment/addendum was executed. In such scenarios, landlords or tenants have two choices: (a) get the amendment/addendum abstracted and added to their existing lease abstract, or (b) get the entire lease abstract audited and then updated to reflect the change due to the execution of the new amendment/addendum. Many opt for option b as it gives them the opportunity to confirm the accuracy of their existing lease abstracts.
Getting an experienced and trusted lease administration services provider to audit your leases can also help by bringing to light any instances where critical lease data may have been missed out. A lease administration services vendor with enough expertise and perspective into the lease abstraction process will also be able to identify any shortcomings in your original lease abstract template. They can help you make changes to your lease abstract template so it is more comprehensive and captures the lease information that matters to you going forward.
A CAM Audit, also known as the desktop audit, is a lease administration process that involves the reconciliation of account payables and receivables, mostly involving Common Area Maintenance (CAM) charges to ensure the tenant is not being undercharged or overcharged depending on who commissions the audit. Usually, CAM audits are commissioned by tenants. Below is the reason why.
In the case of net leases, CAM charges are a core component of the rent roll. The thing about CAM charges is that it includes multiple headers and complicated calculations, which leave room for errors and even interpretation. Tenants need to be aware of the various components of their CAM charges and how they are computed as per their lease. For example, what happens if they move into a fairly empty building that’s only gradually filling up? How is the CAM divided among the existing tenants including them, until the time there is 100% occupancy? What will be the repercussions on your CAM charges as new tenants are signed up?
When it comes to rent roll calculations, the onus is always on the tenant to identify errors, if any, and report them to the landlord. So, tenants need to pay a lot of attention to the core rent roll components such as rent escalation calculations and CAM charges allocation. Overlooking any errors in these calculations will cause them to become a part of the base calculations for the next lease year which can prove very expensive for the tenant. Plus, most leases place a timeframe within which such discrepancies should be reported to the landlord. Failing to do so on time may be construed as acceptance by the tenant to make the payments. This is why most tenants commission regular CAM audits, usually, on an annual basis.
Whether you are a tenant or a landlord, when there is a vast lease portfolio that runs into hundreds of leases or more, CAM reconciliations figures can translate into significant cost savings.