Controllable vs. Non-Controllable Expenses in CAM Reconciliation
Why the Distinction Matters
A 250,000 SF office building has total operating expenses of $2.1M. The lease for a 20,000 SF tenant includes a 5% annual cap on "controllable operating expenses." No cap on non-controllable expenses.
If the controller classifies all $2.1M as subject to the 5% cap, the tenant's maximum year-over-year increase is $105,000 x 5% = $5,250 on their $168,000 share (8% pro-rata). If the controller correctly separates controllable ($1.2M) from non-controllable ($900,000), the cap applies only to the tenant's share of the controllable pool: $96,000 x 5% = $4,800 maximum controllable increase, while the non-controllable share ($72,000) can increase without limit.
Now flip the error. If the controller classifies insurance ($350,000) as controllable when it should be non-controllable, the cap constrains the insurance pass-through. When insurance jumps 18% ($63,000 increase), the cap limits the increase the tenant pays. The landlord absorbs the difference. On one tenant, that might be $2,000. Across a 15-tenant building over three years, the misclassification costs the landlord $50,000-$80,000 in unrecovered expenses.
Classification drives dollars. Getting it right is not an academic exercise.
Standard Classifications
There is no universal standard. Each lease defines what is controllable and what is not. But the following classifications represent the most common treatment across institutional commercial leases.
Controllable Expenses
| Category | GL Range (Typical) | Why Controllable |
|---|---|---|
| Janitorial / Cleaning | 6100-6199 | Landlord selects vendor and service frequency |
| Landscaping / Grounds | 6300-6399 | Landlord selects vendor and scope |
| Security | 6500-6549 | Landlord sets staffing levels and technology |
| General R&M (non-contract) | 6200-6249 | Landlord decides when and how to repair |
| Elevator Maintenance | 6250-6259 | Landlord negotiates contract terms |
| HVAC Maintenance | 6260-6269 | Landlord negotiates contract terms |
| Pest Control | 6550-6559 | Landlord selects vendor |
| Window Washing | 6150-6159 | Landlord sets frequency |
| Trash Removal | 6560-6569 | Landlord selects vendor and container size |
| Management Fee | 6900-6999 | Landlord sets fee percentage or negotiates with third-party manager |
| Parking Lot Maintenance | 6350-6359 | Landlord decides scope and timing |
| Common Area Supplies | 6170-6179 | Landlord selects products and quantities |
Non-Controllable Expenses
| Category | GL Range (Typical) | Why Non-Controllable |
|---|---|---|
| Real Estate Taxes | 6800-6899 | Set by government assessment and millage rate |
| Property Insurance | 6700-6749 | Driven by insurance market conditions and carrier pricing |
| Utilities (Electric) | 6410-6419 | Rate set by utility company or deregulated market |
| Utilities (Gas) | 6420-6429 | Rate set by utility company |
| Utilities (Water/Sewer) | 6430-6439 | Rate set by municipal authority |
| Snow Removal | 6370-6379 | Driven by weather; landlord cannot control snowfall |
| Government-Mandated Compliance | 6600-6649 | Required by regulation (fire inspection, ADA, etc.) |
Gray Area Expenses
These categories are classified differently depending on the lease and the negotiating leverage of the parties.
| Category | Argument for Controllable | Argument for Non-Controllable |
|---|---|---|
| Management Fee | Landlord sets the percentage | Often a fixed % of revenue, tied to market rates |
| Utilities | Landlord controls building hours and equipment efficiency | Rate per kWh or therm is set by the utility |
| Snow Removal | Landlord selects the vendor | Volume is weather-dependent and unpredictable |
| Life Safety / Fire Alarm | Landlord selects the monitoring vendor | Inspections are government-mandated |
| Common Area Electricity | Landlord controls lighting schedules | Rate is set by the utility |
How to Resolve the Gray Areas
Read the lease. If the lease defines "Controllable Expenses" with a specific list, use that list. If the lease uses a general definition ("expenses within Landlord's reasonable control"), apply the test: can the landlord materially influence the total cost through vendor selection, service level, or operational decisions?
For utilities, the most common treatment splits the expense. The utility rate (non-controllable) is separated from consumption (partially controllable). In practice, most leases classify utilities as non-controllable because the rate component dominates the total and tenants cannot verify consumption decisions.
How Caps Interact with Each Category
The financial impact of controllable vs. non-controllable classification becomes visible when you apply expense caps.
Typical Cap Structures
Cap on controllable only (most common):
- Controllable expenses: capped at 5% annual increase
- Non-controllable expenses: no cap, actual pass-through
Cap on total operating expenses:
- All expenses capped at X% annual increase
- Less common; more tenant-favorable
Cap on controllable with floor on non-controllable:
- Controllable: capped at 5%
- Non-controllable: passed through at actual, but the base year amount is the floor (tenant never gets a credit if non-controllable expenses decrease)
Worked Example: Controllable Cap at 5%
Year 1 (Base Year)
| Category | Type | Building Total | Tenant Share (10%) |
|---|---|---|---|
| Janitorial | Controllable | $180,000 | $18,000 |
| Landscaping | Controllable | $65,000 | $6,500 |
| Security | Controllable | $120,000 | $12,000 |
| R&M | Controllable | $210,000 | $21,000 |
| Management Fee | Controllable | $95,000 | $9,500 |
| Controllable Subtotal | $670,000 | $67,000 | |
| Property Tax | Non-Controllable | $420,000 | $42,000 |
| Insurance | Non-Controllable | $280,000 | $28,000 |
| Utilities | Non-Controllable | $195,000 | $19,500 |
| Non-Controllable Subtotal | $895,000 | $89,500 | |
| Total | $1,565,000 | $156,500 |
Year 2 (Actual)
| Category | Type | Building Total | YoY Change | Tenant Share (10%) |
|---|---|---|---|---|
| Janitorial | Controllable | $193,000 | +7.2% | $19,300 |
| Landscaping | Controllable | $68,000 | +4.6% | $6,800 |
| Security | Controllable | $132,000 | +10.0% | $13,200 |
| R&M | Controllable | $225,000 | +7.1% | $22,500 |
| Management Fee | Controllable | $98,000 | +3.2% | $9,800 |
| Controllable Subtotal | $716,000 | +6.9% | $71,600 | |
| Property Tax | Non-Controllable | $445,000 | +6.0% | $44,500 |
| Insurance | Non-Controllable | $330,000 | +17.9% | $33,000 |
| Utilities | Non-Controllable | $208,000 | +6.7% | $20,800 |
| Non-Controllable Subtotal | $983,000 | +9.8% | $98,300 |
Applying the 5% controllable cap:
| Actual | Capped | Landlord Absorbs | |
|---|---|---|---|
| Controllable (tenant share) | $71,600 | $70,350 ($67,000 x 1.05) | $1,250 |
| Non-controllable (tenant share) | $98,300 | $98,300 (no cap) | $0 |
| Tenant pays | $168,650 | ||
| Without any cap | $169,900 | ||
| Landlord absorption | $1,250 |
The landlord absorbs $1,250 on this one tenant because controllable expenses grew 6.9% but the cap limits recovery to 5%. Across 12 tenants with similar caps, the total absorption is approximately $15,000.
Now see what happens if insurance is misclassified as controllable.
Misclassification Impact
If the $330,000 insurance expense is classified as controllable instead of non-controllable, the controllable pool becomes $1,046,000 (Year 2) against a base of $950,000 (Year 1). The cap limits the controllable increase to 5%, or $47,500. But the actual controllable increase (including misclassified insurance) is $96,000.
| Correct Classification | Misclassified Insurance | |
|---|---|---|
| Controllable cap amount (tenant) | $70,350 | $99,750 |
| Actual controllable (tenant) | $71,600 | $104,600 |
| Landlord absorbs (controllable) | $1,250 | $4,850 |
| Non-controllable (tenant) | $98,300 | $65,300 |
| Total tenant pays | $168,650 | $165,050 |
| Landlord absorbs | $1,250 | $4,850 |
The misclassification costs the landlord an additional $3,600 per tenant per year. The insurance increase that should have passed through uncapped is now constrained by the controllable cap. Over a 10-year lease with 15 tenants, that single misclassification error compounds to $100,000+ in lost recovery.
Common Misclassification Errors
Error 1: Management Fee as Non-Controllable
Some controllers classify the management fee as non-controllable because it is a fixed percentage of revenue. But the landlord sets that percentage (or negotiates it with the third-party manager). Most leases treat management fees as controllable.
Financial impact: If the management fee is $95,000 and increases 8% due to a new management contract, classifying it as non-controllable allows the full increase to pass through. Classifying it correctly as controllable means the 5% cap limits the pass-through, and the landlord absorbs the excess. The direction of the error depends on which classification the lease specifies.
Error 2: Utilities as Controllable
Classifying utilities as controllable subjects them to the cap when the lease intended them to be uncapped. If electric rates jump 12% due to a rate case at the utility commission, that increase has nothing to do with landlord decisions. Capping it means the landlord absorbs the difference.
Best practice: Unless the lease specifically lists utilities as controllable, classify them as non-controllable. If the lease uses a broad definition, argue that utility rates are set by regulated monopolies and are outside the landlord's control.
Error 3: Contract Services Classified Inconsistently
A janitorial contract (controllable) and an elevator maintenance contract (controllable) are both vendor contracts. But some controllers classify elevator maintenance as non-controllable because the building "needs" an elevator contract. That logic would make every expense non-controllable. The test is whether the landlord can influence the cost through vendor selection and contract terms, not whether the service is optional.
Error 4: Failing to Separate Components
A single GL account called "Building Maintenance" contains $180,000 in controllable R&M and $35,000 in government-mandated fire alarm inspections (non-controllable). If the entire $215,000 is classified as controllable, the mandated inspection costs are subject to the cap when they should not be.
Fix: Use sub-accounts or cost codes to separate controllable and non-controllable components within blended GL accounts. The time spent on proper coding saves multiples in accurate recovery.
Lease Language Patterns
Explicit List (Best Practice)
"Controllable Expenses shall mean janitorial, landscaping, security, general maintenance and repair, pest control, window washing, trash removal, management fees, and common area supplies. All other Operating Expenses shall be Non-Controllable Expenses."
No ambiguity. Both parties know exactly which expenses are subject to the cap.
Definition-Based (Common but Creates Disputes)
"Controllable Expenses shall mean those Operating Expenses that are within Landlord's reasonable ability to control through management decisions."
This language invites disagreement on every gray-area expense. What is "reasonable ability to control"? The landlord says utility rates are uncontrollable. The tenant says the landlord controls building operating hours and thermostat settings. Neither is wrong.
No Distinction (Tenant-Unfavorable)
"Operating Expenses shall increase by no more than 5% per annum on a cumulative, compounding basis."
The cap applies to everything. Insurance jumps 18% and the landlord absorbs the excess above 5%. Taxes increase 8% and the landlord absorbs. This structure is uncommon in institutional leases because it shifts too much risk to the landlord.
Building Your Classification Matrix
For each property, maintain a classification matrix that maps every GL account to controllable or non-controllable based on the governing lease terms. For buildings with multiple tenants on different lease forms, you may need different classifications for different tenants.
Example matrix:
| GL Account | Description | Tenant A (2019 Lease) | Tenant B (2022 Lease) | Tenant C (2024 Lease) |
|---|---|---|---|---|
| 6100 | Janitorial | Controllable | Controllable | Controllable |
| 6200 | R&M | Controllable | Controllable | Controllable |
| 6410 | Electric | Non-Controllable | Controllable | Non-Controllable |
| 6700 | Insurance | Non-Controllable | Non-Controllable | Non-Controllable |
| 6800 | Property Tax | Non-Controllable | Non-Controllable | Non-Controllable |
| 6900 | Management Fee | Controllable | Non-Controllable | Controllable |
Note that Tenant B's 2022 lease classifies electric as controllable and management fee as non-controllable. This is tenant-specific lease language that must be applied individually. Applying Tenant A's classification to Tenant B's reconciliation produces incorrect billings.
How CapVeri Handles Classification
CapVeri stores the controllable/non-controllable classification at the lease level, not the building level. Each tenant's reconciliation applies their specific lease terms to the shared expense pool. When a GL account is classified differently across leases in the same building, the system calculates each tenant's cap independently using their lease-specific classification.
This eliminates the spreadsheet error where one classification matrix is applied across all tenants regardless of individual lease terms.
Related Resources
- CAM Expense Caps — Deep dive on cap mechanics, cumulative vs. non-cumulative
- What Is Included in CAM Expenses — Full operating expense classification guide
- GL Coding Guide — Setting up GL accounts to support controllable/non-controllable separation
- CAM Leakage Guide — How misclassification contributes to revenue leakage