CAM Reconciliation for New Acquisitions

The Acquisition Gap

You close on a 150,000 SF office building on July 15. The seller hands over a binder of lease files, a Yardi database backup, and a prorated operating expense credit at closing.

Now you need to send a reconciliation statement covering January 1 through December 31. You own the building's accounting for six months. The seller owned it for six and a half. And the tenants expect one statement covering the full year.

This is where most acquisition reconciliations go wrong.

The Purchase Agreement

Three clauses in the purchase agreement directly affect your reconciliation:

1. Operating Expense Proration

The standard approach prorates operating expenses at closing based on the seller's budget or prior year actuals. A typical clause:

"Operating expenses shall be prorated as of the Closing Date based on the Operating Expense Budget attached as Exhibit K. Within 90 days after year-end, Buyer shall prepare the annual reconciliation and the parties shall true-up the proration based on actual expenses."

This means the closing proration is an estimate. The true-up happens after you've completed the full-year reconciliation.

2. Seller Representations on CAM

Most purchase agreements include a representation that the seller has been billing CAM in accordance with lease terms. This representation typically survives closing for 12–18 months.

If you discover the seller was billing incorrectly — wrong pro-rata shares, improper gross-up, unapplied caps — you may have a claim under the seller's representations. But only if you find the errors within the survival period.

3. Post-Close Cooperation

The agreement should require the seller to cooperate in providing historical operating expense data, lease abstracts, and reconciliation workbooks. Without this clause, getting the pre-close data you need becomes a negotiation rather than an obligation.

Data You Need from the Seller

Before closing — ideally during due diligence — request:

Critical: Get the reconciliation workbooks, not just the statements. The workbooks show the formulas. The statements only show the outputs. An error in the workbook could be producing the wrong result for every tenant — and you won't catch it from the statement alone.

First-Year Reconciliation Steps

Step 1: Merge the Expense Data

You'll have two sources of GL data: the seller's for January through mid-July, and yours for mid-July through December.

If you kept the same property management system (common with Yardi database transfers), the data may be in one GL. If you migrated to a different system, you need to combine two exports.

Reconcile the transition point carefully. Check for:

• Expenses recorded by both the seller and buyer in the week of closing (double-counting)
• Expenses that fell into neither side's records (gaps)
• Accruals the seller reversed that you didn't re-record
• Pre-paid expenses (insurance, service contracts) that the seller paid for the full year

Step 2: Validate the Seller's Pre-Close Data

Don't accept the seller's expense numbers at face value. Run the same checks you'd apply to your own data:

• CapEx classification review on entries over $5,000
• Verify gross-up was applied correctly (variable expenses only)
• Check that management fees match the management agreement
• Confirm property tax amounts match the county tax bill
• Look for any unusual entries in the weeks before closing (sellers occasionally accelerate expenses or defer them to manipulate the proration)

Step 3: Apply Current Lease Terms

The lease terms didn't change at closing (assuming no modifications). Use the same cap rates, base years, gross-up thresholds, and pro-rata shares the seller should have been using.

But verify them. Common findings during first-year reconciliation under new ownership:

• Seller was using wrong tenant SF (didn't update after a tenant expansion)
• Seller wasn't applying cumulative cap carry-forwards
• Seller's base year amount doesn't match the original base year reconciliation
• Seller had the gross-up threshold wrong (using 90% instead of 95%)

Step 4: Send a Combined Statement

Tenants receive one annual reconciliation statement — they don't care about the ownership change. Your statement covers January 1 through December 31 with combined expenses.

Include a brief note in the cover letter:

"Property ownership transferred on [date]. This reconciliation statement reflects operating expenses for the full calendar year, combining pre-transfer and post-transfer periods. All calculations are based on the terms of your lease, which remain unchanged."

Step 5: True-Up with the Seller

After completing the reconciliation, compare actual full-year expenses to the proration estimate used at closing. If the closing proration was based on a budget that underestimated actual expenses, the seller owes you the difference for the pre-close period (and vice versa).

This seller true-up is separate from the tenant true-up. Calculate it based on the actual expenses for the seller's ownership period, not the full year.

Timing Considerations

First-year reconciliation after acquisition typically takes 30–50% longer than a normal year. Plan for it:

• Start the data merge process immediately after closing — don't wait until January
• Request seller cooperation early (you have more leverage in the first 90 days)
• Budget additional controller hours for the first reconciliation cycle
• Consider running CapVeri on the pre-close data to identify any errors you're inheriting

Michigan: Tax Uncapping

In Michigan, property tax "uncaps" at sale — the assessed value resets to current market value, which may be significantly higher than the seller's capped value. This can increase the property tax bill by 20–50% in the first year.

This uncapping directly affects your CAM tax pass-through. Tenants will see a significant increase in the tax component of their CAM charges. The cover letter should explain the uncapping mechanism to preempt disputes.

Related Resources

• CAM Reconciliation Timeline — Month-by-month workflow
• Self-Audit CAM Billing — Validate seller's calculations
• PE Firms Evaluate CAM — Due diligence perspective
• Recovery Ratio Analysis — Benchmark the acquisition