Commercial Cam Operating Expense Reconciliation Dispute Letters
Commercial CAM & Operating Expense Dispute Letters
California Commercial Tenant Rights
Understanding CAM Charges in Commercial Leases
CAM (Common Area Maintenance): Charges for maintaining shared areas in multi-tenant properties (shopping centers, office buildings). Tenants pay pro rata share of costs based on square footage. Subject to frequent disputes over what’s includable, how costs are allocated, and accuracy of landlord’s reconciliation.
What CAM Typically Includes
- Parking Lot: Paving, striping, lighting, snow/ice removal, sweeping
- Landscaping: Mowing, trimming, irrigation, seasonal plantings
- Building Common Areas: Lobby, hallways, elevators, restrooms (cleaning, repairs, utilities)
- Utilities: Common area electricity, water, gas
- Security: Patrol services, cameras, access control systems
- Property Management: Management fees (often capped at 10-15% of CAM)
- Insurance: Property insurance (some leases separate this as “operating expense”)
- Property Taxes: Real property taxes (often billed separately as “tax escalation”)
What CAM Excludes (Typically)
- Capital improvements (e.g., new roof, parking lot replacement) – typically amortized over useful life
- Structural repairs to building (landlord’s responsibility, not operating expense)
- Leasing commissions and tenant improvement costs for new tenants
- Landlord’s corporate overhead unrelated to property operations
- Costs to repair damage caused by landlord’s negligence
- Costs already paid by tenants directly (e.g., tenant’s own utilities, janitorial)
CAM Reconciliation Process
Most commercial leases require annual CAM reconciliation:
- Estimated Monthly CAM: Tenant pays estimated CAM each month along with base rent
- Year-End Reconciliation: After year ends, landlord calculates actual CAM expenses
- True-Up: If actual > estimate, tenant pays additional; if actual < estimate, tenant receives credit
- Statement Due: Lease typically requires landlord provide reconciliation within 90-180 days after year end
- Audit Rights: Tenant has right to audit landlord’s books (usually within 30-90 days of receiving statement)
Tenant’s Audit Rights
Most leases grant tenant right to audit CAM charges:
- Must provide written notice within specified time (typically 30-90 days after receiving reconciliation)
- Tenant (or tenant’s CPA) can inspect landlord’s books and records
- Landlord must provide supporting documentation (invoices, receipts, allocation schedules)
- If audit finds overcharge exceeding certain threshold (e.g., 5%), landlord pays audit costs
Common CAM Disputes
1. Capital vs. Operating Expenses
Major Dispute Area: Landlords often bill capital improvements as CAM (operating expenses). Tenants argue these should be excluded or amortized over useful life, not charged 100% in one year.
Examples:
- Parking lot resurfacing ($100K+ project) – capital, should be amortized over 15-20 years
- Roof replacement – capital, not operating expense
- New HVAC system – capital
- Repaving vs. patching – total replacement is capital; pothole repairs are operating
2. Improper Allocation
CAM must be allocated pro rata based on tenant’s square footage:
- Error: Landlord allocates 100% of costs to occupied spaces, excluding vacant spaces → inflates occupied tenants’ share
- Correct: Allocate based on total leasable square footage (including vacant)
- Error: Landlord double-bills certain costs (e.g., charges management fee on insurance, which already includes overhead)
3. Ineligible or Inflated Costs
- Landlord bills personal expenses (lawn care at landlord’s home)
- Excessive management fees (15%+ when market is 5-10%)
- Charges for services not actually performed (e.g., “security patrol” that doesn’t exist)
- Charges for items excluded by lease (e.g., structural repairs, leasing commissions)
- Duplicate charges (billing same invoice twice)
4. Lack of Supporting Documentation
Landlord provides reconciliation but refuses to provide:
- Actual invoices and receipts
- Detailed allocation schedule showing how costs were divided
- Proof that services billed were actually performed
- Breakdown of management fee calculation
5. Gross-Up Issues
In multi-tenant properties, if building is not fully occupied, some leases allow “gross-up” (calculating CAM as if building were 95-100% occupied):
- Lease allows gross-up: Landlord can gross-up variable costs (utilities, trash) but not fixed costs (insurance, taxes)
- Lease silent: No gross-up; tenant pays actual pro rata share based on occupancy
- Dispute: Landlord grosses up fixed costs improperly
How to Audit & Dispute CAM Charges
Step 1: Review Reconciliation Statement
When you receive annual CAM reconciliation:
- Compare to prior years’ charges – are costs increasing dramatically?
- Check allocation percentage – does it match your square footage?
- Review line items for red flags (capital items, unusually high management fees, vague descriptions like “miscellaneous”)
- Verify base year or expense stop (if applicable)
Step 2: Send Audit Notice (Promptly)
If reconciliation seems questionable, send written audit notice within lease deadline (typically 30-90 days):
- State you are exercising audit rights per Lease § [X]
- Request full documentation: invoices, receipts, allocation schedules, management fee calculations
- Propose dates for audit (give landlord reasonable options)
- Reserve right to dispute charges after audit
Step 3: Conduct Audit
Hire a CPA or commercial lease audit firm:
- Review all invoices to verify charges are legitimate and properly allocated
- Identify capital expenses improperly charged as operating
- Check for duplicate or missing credits
- Verify allocation percentages and occupancy calculations
- Document all discrepancies with references to specific invoices/line items
Step 4: Send Dispute Letter
After audit, send formal dispute letter:
- List each disputed charge with specific reasons (cite lease provisions, industry standards)
- Calculate corrected CAM amount and refund owed to tenant
- Demand refund within specified time (30-60 days)
- State you will withhold future CAM payments or pursue litigation if not resolved
Step 5: Negotiate or Litigate
Negotiation: Many disputes settle when landlord realizes tenant has legitimate claims and audit documentation.
Litigation: If landlord refuses to refund overcharges, sue for breach of lease, seeking refund, attorney fees, and audit costs.
Sample CAM Dispute Letters
Sample 1: Audit Notice
[Tenant Name]
[Address]
[Date]
[Landlord Name]
[Address]
RE: NOTICE OF AUDIT – CAM RECONCILIATION FOR [YEAR]
Lease dated [Date]
Dear [Landlord]:
I am exercising my audit rights under Section [X] of the Lease for the Common Area Maintenance reconciliation statement you provided for the year ending [Date].
I request access to all supporting documentation, including:
• All invoices, receipts, and bills for expenses included in the reconciliation
• Detailed allocation schedules showing how costs were divided among tenants
• Management fee calculation and breakdown
• Occupancy reports for the property
• Any third-party contracts (landscaping, security, property management)
I propose conducting the audit on [Date] at [Time]. Please confirm this date or propose alternative dates within the next 10 business days.
I reserve all rights to dispute charges after completing the audit.
Sincerely,
[Your Signature]
[Your Name]
Sample 2: CAM Dispute (Capital vs. Operating)
[Tenant Name]
[Address]
[Date]
[Landlord Name]
[Address]
RE: DISPUTE OF CAM RECONCILIATION FOR [YEAR] – DEMAND FOR REFUND
Dear [Landlord]:
I dispute the CAM reconciliation statement dated [Date] and demand a refund of $[Amount] for improperly included charges.
AUDIT FINDINGS:
My audit of your books revealed the following errors:
1. CAPITAL EXPENSES IMPROPERLY CHARGED AS OPERATING EXPENSES:
• Parking lot resurfacing ($[Amount]) – This is a capital improvement with 15-20 year useful life, not an operating expense. Per Lease § [X], capital improvements must be amortized. Proper annual charge: $[Amount/15 years].
• Roof replacement ($[Amount]) – Capital item, should be amortized over 20 years.
2. IMPROPER ALLOCATION:
• Your reconciliation allocates 100% of costs to occupied spaces (excluding 3 vacant suites totaling [X] SF). Per Lease § [X], CAM must be allocated based on total leasable square footage. This inflates my share by approximately [X]%.
3. EXCESSIVE MANAGEMENT FEE:
• You charged 15% management fee. Market rate is 5-10%. Lease § [X] states fees must be “reasonable and customary.” Overcharge: $[Amount].
4. INELIGIBLE CHARGES:
• “Leasing commissions” ($[Amount]) – Explicitly excluded by Lease § [X]
• “Structural repairs” ($[Amount]) – Landlord’s responsibility, not CAM
CORRECTED CAM CALCULATION:
Total CAM per your statement: $[Amount]
Less: Capital items (unamortized): ($[Amount])
Less: Improper allocation error: ($[Amount])
Less: Excessive mgmt fee: ($[Amount])
Less: Ineligible charges: ($[Amount])
CORRECTED TOTAL CAM: $[Amount]
My share (based on correct %): $[Amount]
Amount I paid: $[Amount]
REFUND OWED TO ME: $[Amount]
Additionally, my audit costs totaled $[Amount]. Per Lease § [X], because the overcharge exceeds 5%, you must reimburse my audit costs.
TOTAL REFUND DUE: $[Amount + Audit Costs] = $[Total]
DEMAND:
I demand full refund of $[Total] within 30 days. Apply this refund as credit against my next CAM payments.
If you do not refund within 30 days, I will:
• Withhold future CAM payments until resolved
• File lawsuit for breach of lease seeking refund, attorney fees, and prejudgment interest
Attached is my auditor’s detailed report.
Sincerely,
[Your Signature]
[Your Name]
Attachment: Audit Report
Litigation & Tenant Remedies
When to Litigate
- Overcharges exceed $10,000-$25,000 (makes litigation economically viable)
- Pattern of overcharging across multiple years
- Landlord refuses to provide audit documentation or negotiate
- Lease includes attorney fee clause (prevailing party recovers fees)
Claims to Assert
- Breach of Lease: Landlord violated lease provisions governing CAM charges
- Breach of Implied Covenant of Good Faith: Landlord acted in bad faith by inflating charges
- Fraud (if applicable): Landlord intentionally misrepresented costs or billed for services not performed
- Declaratory Relief: Request court interpret lease provisions regarding what’s includable in CAM
Damages Recoverable
- Refund of overpaid CAM charges (multiple years if pattern of overcharging)
- Prejudgment interest
- Audit costs (if lease provides or overcharge exceeds threshold)
- Attorney fees (if lease includes reciprocal attorney fee clause)
Withholding CAM Payments
⚠️ Risk: Withholding CAM may constitute lease default, allowing landlord to terminate lease. Safer approach: pay under protest and sue for refund. If you do withhold, hold disputed amounts in escrow to show good faith.
Attorney Services
Disputing Inflated CAM Charges?
I represent commercial tenants in CAM disputes. I review reconciliations, coordinate audits, negotiate with landlords, and litigate when necessary to recover overcharges.
How I Can Help
- Review CAM reconciliation statements and identify red flags
- Draft audit notice letters and coordinate with CPAs
- Negotiate with landlords to resolve disputes pre-litigation
- File lawsuits for breach of lease seeking refunds and attorney fees
- Advise on whether to withhold future CAM payments or pay under protest
Schedule a Call
Book a call to discuss your CAM dispute. I’ll review your reconciliation statement and lease, assess your rights, and advise on the best strategy for recovering overcharges.
Contact Information
Email: owner@terms.law
Frequently Asked Questions
Depends on lease. Most leases exclude capital improvements or require amortization over useful life. If landlord bills $100K parking lot replacement as single-year CAM charge, that’s improper. Should be amortized over 15-20 years ($5K-$6.7K/year). Review your lease’s definition of “Operating Expenses” or “CAM.” If silent, argue capital items are excluded or must be amortized.
Lease typically grants audit rights and requires landlord provide supporting documentation. If landlord refuses, send demand letter citing lease provision, state refusal prevents you from verifying charges. If landlord continues to refuse, sue for breach of lease and request court order compelling production of documents. Refusal suggests landlord is hiding improper charges.
Risky. Withholding may constitute lease default. Safer: pay under protest and sue for refund. If you do withhold, hold disputed amounts in escrow, notify landlord in writing that payment is disputed and held pending resolution. Some leases explicitly prohibit withholding even if charges are disputed. Check your lease before withholding.