A CAM audit is an investment decision. The lease sets what can be recovered, how far back, and who pays for the audit, and those decide whether it pays.
A tenant recovers its pro rata share of every disallowed cost, plus the administrative fee charged on it, for the years the audit clause lets it reopen, and keeps the audit fee only if the overcharge passes the clause's cost-shifting threshold. On an illustrative 25,000 sq ft tenant billed $264,000 of CAM, three findings cut the correct charge to $221,100: a refund of $42,900, 19.4 per cent of the correct charge, with the landlord paying the $12,000 audit because the 3 per cent threshold is passed. The same audit finding only the duplicate invoice would have cost the tenant $7,050.
Worked in full in How to Read a Commercial Lease by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A CAM audit is an investment decision. The tenant spends money up front for an uncertain refund, and the lease decides most of the arithmetic: what the landlord may recover, how far back the tenant may look, and who pays for the audit. Read those three clauses first, then the reconciliation statement.
| Input | Value |
|---|---|
| CAM pool billed for the year | $2,400,000 |
| Administrative fee on the pool | 10.0% |
| Tenant area / gross leasable area | 25,000 / 250,000 sq ft |
| Tenant's pro rata share | 10.0% |
| Audit cost (fixed fee) | $12,000 |
| Landlord pays the audit if the overcharge exceeds | 3.0% of the correct charge |
| Years remaining on the lease, including this one | 5 |
Billed = pool × (1 + admin fee) × pro rata share = $2,400,000 × 1.10 × 10.0% = $264,000.
| Finding | Removed from pool | Tenant share | of which admin fee |
|---|---|---|---|
| Roof replacement of $300,000 expensed instead of amortised over 15 years ($20,000 allowed) | $280,000 | $30,800 | $2,800 |
| Leasing commissions and landlord's legal fees, excluded by the lease | $65,000 | $7,150 | $650 |
| Invoice billed twice | $45,000 | $4,950 | $450 |
| Total | $390,000 | $42,900 |
Correct charge = ($2,400,000 − $390,000) × 1.10 × 10.0% = $2,010,000 × 1.10 × 10.0% = $221,100.
Overcharge = $264,000 − $221,100 = $42,900, or 19.4 per cent of the correct charge (16.2 per cent of what was billed).
In Excel: =Disallowed*(1+AdminFee)*TenantSF/GLA for each finding; the threshold test is =Overcharge/CorrectCharge>3%.
The administrative fee matters more than it looks. Where the lease charges a percentage fee on the pool, every disallowed dollar carries its fee with it, so the refund is 10 per cent larger than the tenant's share of the cost removed. The fee mechanics are worked in how a CAM administrative fee is calculated.
The threshold here is 3.0 per cent of the correct charge, $6,633. At $42,900 the overcharge clears it comfortably, the landlord reimburses the $12,000 audit, and the tenant keeps the whole refund. Below the threshold the tenant pays its own audit, and the refund has to exceed $12,000 to be worth having.
| What the audit finds | Pool error | Overcharge | % of correct charge | Audit paid by | Net to tenant |
|---|---|---|---|---|---|
| Half the duplicate invoice | $22,500 | $2,475 | 0.9% | Tenant | −$9,525 |
| Duplicate invoice only | $45,000 | $4,950 | 1.9% | Tenant | −$7,050 |
| Excluded costs only | $65,000 | $7,150 | 2.8% | Tenant | −$4,850 |
| All three findings | $390,000 | $42,900 | 19.4% | Landlord | $42,900 |
Two break-evens follow. The threshold is crossed at a pool error of about $69,903 ($7,689 to this tenant). Paying for its own audit, the tenant needs pool errors of $109,091 to recover the $12,000. A 10 per cent tenant should commission a fixed-fee audit when it has a reason to expect something large, such as a capital project, a change of manager, or a jump in the reconciliation, and not as routine.
Lookback. If the excluded leasing commissions and legal fees appeared in the two previous statements as well, a three-year audit window adds $14,300, for $57,200 in all. A clause that only allows the current statement to be challenged leaves that on the table, which is why the audit window is worth negotiating at signing, not at reconciliation.
The capital item is partly timing. Amortised over 15 years, the roof costs this tenant $2,200 a year. The $30,800 refund is real cash now, but the landlord will bill $8,800 of amortisation over the four remaining years of the lease. The permanent saving is $22,000: the tenant pays $11,000 for the roof over its lease instead of $33,000. A tenant with 15 years to run would save almost nothing on this finding, only the time value.
The usual error is to engage an auditor on a contingency fee, 30 per cent of the recovery here, or $12,870, without checking the lease. Many audit clauses prohibit contingency-fee auditors, and a landlord that reimburses audit costs above the threshold will usually reimburse a reasonable fixed fee, not a share of the refund. The second error is to count the full capital refund as a saving, as above. The basis of the share itself, area over gross leasable area, is the subject of how to calculate a tenant's pro rata share of CAM, and it is the first line any audit should test.
Before commissioning the audit: estimate the pool error you expect, convert it to your share with the fee, and compare it with the threshold and the audit cost. If the expected overcharge is below both, ask for the supporting invoices instead.
Recovery = disallowed pool costs × (1 + admin fee) × pro rata share, for each year inside the lookback. Here $42,900, the landlord pays the audit, and $22,000 of the roof finding is a permanent saving. How each clause in a lease moves net operating income and value is set out in the free workbook and working documents for this book.
The tenant, unless the lease shifts the cost to the landlord when the overcharge passes a threshold, often 3 to 5 per cent. In the illustration the threshold is 3.0 per cent of a $221,100 correct charge, $6,633; the audit finds $42,900, so the landlord reimburses the $12,000 audit fee.
Only as far as the lease allows, commonly the statement of the last one to three years. If excluded costs worth $7,150 a year to the tenant were billed in the two prior years too, a three-year window recovers $14,300 more, $57,200 in all, while a one-year window loses it.
Only if the expected overcharge exceeds the audit cost or the cost-shifting threshold. A 10 per cent tenant paying a $12,000 fixed fee needs pool errors of about $109,091 to break even, or about $69,903 to make the landlord pay. A duplicate $45,000 invoice alone leaves it $7,050 worse off.
This article is one calculation from How to Read a Commercial Lease. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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