How often do you see overbilling on CAM to tenants?
With CAM reconciliation season in full swing, is it common to see overbilling of CAM, like padding the expenses a bit to squeeze more juice from a tenant? I am mainly referring to like corporate tenants or better quality ones that have the balance sheet to pay whatever the bill is.
You mean like fraud? It's all good and dandy until the audit comes back, which is usually from the corporate clients that are knowledgeable enough to employ such contingency based services. Once they find a decently sized mistakes, be prepared to have all your books poured through
Yea I dont mean lying and making up fake expenses. I just mean billing a higher expense load. I mean like we bump up our accounting fee like $5k. We bill a fee for sweeping the parking lot thats $1500 instead of maybe $200.
Yeah idk that sounds like making up fake expenses to me. They're just small ones instead of large ones lol
That... that is literally making up fake expenses... And is fraud if done intentionally as far as I'm aware unless you have in writing that you can bill whatever the fuck you want...
We always have over billing in CAMs and we squeeze as much in as possible. Up to the tenant to audit, which they rarely ever do unless they're a sophisticated tenant.
Most tenants, if local / regional, barely even know their own lease rights.
Who are generally the sophisticated tenants? Out of curiosity.
The tenants with an experienced multi-person real estate department overseeing lease structures, CAM reimbursements, etc.
I've seen more underbilling than overbilling this year; however, I'm in Chicago where commercial properties are getting killed by large assessment increases. Prior to this year, overbilling was pretty typical and amounted to $0.50 to $1.00psf on highrise offices, which was always reconciled.
smart and national tenants usually have provisions and caps within lease.
We have leases with no provisions or caps. Tenants are well capitalized, but not Starbucks like. So just wondering if we can bump our expense load a bit. By a bit I mean the tenant would see an increase of 20% for the additional rent not base rent.
Um, I mean I just wouldn't do it?
They should just pay for all their legally obligated expenses. This might bite you in the ass depending on how much time they have on their lease.
Want to get sued? Execute this strategy.
Still unclear to me why you think it's possible to just "bump" expense load unless you're talking about occupancy gross-ups...which should have an explicit definition in the lease and won't apply to all expenses (only those that are impacted by occupancy). Unless your accounting fee is based on revenue, gross-ups would not apply to either of your examples.
Apart from absolute bottom-barrel commercial leases, there are almost always definitions for what can be charged back and majority of the time it's "landlord's actual expenses incurred". As noted by multiple people, sophisticated tenants will heavily negotiate gross-up provisions, annual caps on increases (either aggregate or individual expense categories), expense exclusions (i.e. additional direct cleaning provided to another tenant), audit/contest timelines, etc. This is where CAM can really start to get complex.
Assuming you're not talking about gross-ups, can you walk us through how you justify billing an expense pool that's greater than what you actually spent? Trying to give the benefit of the doubt but not giving us much to work with here.
Over-billing on CAM, as you said ' bumping up expense load ' from actuals to ' made-up ' - that's a law suit waiting to happen
Only 'overbilling' I've seen is through admin fees and property management.
In house property management but still charge a % revenue back to the tenants = 'overbilling' ... not really, but you'll make profit on your in house management
Other form is admin fees like 15% on everything, $150 parkade ? $150 x 1.15 billed back to the tenants
Billing back 10x back to the tenants is not right, and honestly you're hurting yourself when you go back to sell the asset or get an appraisal for a refi since you're showing high opex.
Yes this is what I am referring too. Yes no way we wanna do something ridiculous to the tenants, but are looking to just see if we can bill back from extra admin and PM fees.
You really wanna cheese your tenants? Here's how I would do it:
- 15% admin fee on CAM, inclusive of property tax. Property tax is usually excluded from admin fees and being the largest expense, an extra 15% recovery on prop tax is juicy to the bottom line
- 15% admin fee on property management, yes thats right. We have admin fees on admin fees...
- 15% admin fee on amortized capex billed back to the tenant (if you're charging back some roof repairs, etc.), slap anotha 15% on it
Your biggest lever is the admin and property management expense line items. Your lease clauses will have to support the above notes obviously.
Thats my blackbook on how to cheese some extra dollars
Highest recovery ratio I've seen was a suburban office building at 127% recovery on cash expenses through various admin fee structures.
Wow, I don’t work in real estate, but this sounds like an extremely scummy thing to do. Blatantly overcharging your tenants to juice returns? Oh my. I agree with the guy above, this sounds like fraud plain and simple. I think this may be one of the reason for the general public’s disdain for the real estate industry. Maybe time to take a look in the mirror
Obviously do not condone over billing a tenant for made up expenses. Do not risk a $1 to make a $.10…
Just saying though, having someone who’s in IB talk down to people because apparent fraud in their industry is ironically pretty funny.
So we're primarily a MF shop but I was asked to look into this by my execs. It felt scummy 100%. Its not something I would do personally or imagine doing. They write my check and asked me to research it. I'll just tell them, its not a good idea.
Fraud... doesn't make sense to squeeze a couple bucks here and there. Next buyer is going to recognize this (assuming decent due diligence) and will refuse to recognize the income.
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