Property management systems, Lease Management Systems and also advanced Integrated Workplace Management Systems (IWMS) need to manage the Common Area Maintenance (CAM) charges and allocations to tenants automatically and smoothly. Because of the lack of a reliable, automated process, this is usually performed in Excel spreadsheets which is tedious and error prone.
Service costs are net charges billed to tenants in a commercial lease and are paid by tenants to the landlord of a commercial property. Service costs often include Common Area Maintenance (CAM) charges where each tenant pays their pro rata share of a property’s total maintenance charges for common areas. Service costs can be based on a fixed amount per unit/area or on actual usage based on meter readings. Usually tenants prepay for service costs every month based on an estimated amount. The actual amounts depend on the actual price of electricity or overall electricity usage for the building which are not known ahead of time. When invoices from the utility company come in during a period the actual cost are calculated per tenant. The difference between the actual cost and the prepaid cost is calculated and invoiced to the tenant. The process of assigning different types of cost to tenants based on actual cost is referred to a service cost reconciliation. The process is complex because it includes many variables such as the formula for allocating costs, the period the tenant has occupied the area, the billing period of actual expenses to the property owner and the size of the area or number of units rented. To automate this process, a system needs to manage the allocation periods, cost types, allocation amounts and reconcile the actuals against the receipts. This process is briefly explained below.
An allocation period is a period during which certain costs must be reconciled. During an allocation period costs that qualify for reconciliation are collected and reconciled with the advance payments made by a tenant during that period.
You may have different allocation periods depending on the type and frequency of the charges, for example:
- The allocation periods for heating costs are from July 1st of a certain year through June 30th of the following year.
- The allocation periods for maintenance costs are from January 1st through December 31st.
Allocation Cost Types
The costs that need to be reconciled need to be defined at the property level. It specifies which costs are collected during the allocation period to be reconciled. Allocation period type is a name or a short description of an allocation period.
Examples of allocation period types (allocation cost types) are:
- Heating costs
- Maintenance costs
- Property tax
- Reserve funds
Determining the Tenants Share of the Costs
For each tenant, you need to allocate their share of the costs. The allocations may be based on a number of different factors as described below.
Rented area size
In this case, the allocation is based on the usable area size of the areas of the tenant.
If the building is rented based on the Units, you can allocate the cost based on each tenant’s rented units.
You may also need to setup a fixed percentage of the cost based on the type of lease and negotiations.
In certain cases, a tenant may need to pay a fixed amount regardless of the actual charges.
Setting up Leases and Contracts
Any advance payments to be charged for service costs need to be defined in a lease/contract. These amounts are used to offset any allocated service costs during the reconciliations.
A contract may have several cost items. Each billable service cost needs to be itemized in the contract.
The contract item with a reconcilable amount, needs to be identified as such.
As invoices are received for reconcilable charges, they are booked against the property.
When a reconciliation is scheduled, the system totals up all costs and organizes them into the indicated Cost Types. It will then allocate each cost to different tenants depending on their predefined allocations. Once the allocations are reviewed and approved, the reconciliation reports are generated for each tenant. The reconciliations indicate the prepaid amounts versus the allocated costs.
The system can then issue reconciliation invoices or credits based for each tenant.
About the author
Mehdi Khalvati, Ph.D. is the president of Axxerion Inc. Axxerion IWMS addresses properties and workplaces management and has a comprehensive cost allocation, CAM reconciliation module built in. For more information, please review the property management modules (https://axxerionusa.com/software/iwms/commercial/) and contact Axxerion USA. Please send your feedback, thoughts and comments to email@example.com.