THE INTRODUCTION:
The company in question has a significant presence in the leasing/ rental business in India. It has a prominent space spread across 1 million square feet and has more than 0.45 million square feet of prime retail space.
THE PROBLEM:
The company seeks detailed computation of its common area facility and related costs and assurance that its common area maintenance (CAM) charges [1] are reasonable and in accordance with the company's CAM policy and the agreements with its space buyers/ retailers. This, in common parlance, is referred to as the CAM Audit.
THE SOLUTION:
An elaborate audit of CAM and related costs was conducted to ensure that pricing is reasonable and in line with the company's concerned policies and relevant buyers/ retailers' agreements. The information was also used for billing tenants/buyers/retail space owners covering elements of resource deployment, upkeep, consumables, utility (air, water, and electricity), etc.
Each cost element of common area maintenance was thoroughly diagnosed as follows:
Cost Element | ​Explanation | Audit Approach (Check-Points) Deployment Cost |
Deployment Cost | Maintenance agency and outsourced employee costs are directly identified to the common area and segregated based on nature and work area. Deployment cost is mainly segregated into the following areas:
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​Upkeep Cost | Expenses related to facility maintenance like annual maintenance charges (AMC) of assets, pest control, whitewash expenses, etc. |
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Consumables | Indirect materials utilised for common service operations like plumbing materials, paints, lubricating oil, spares,etc. |
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Utilities cost | Water, electricity and air conditioning are utilised in the common area of the building. Air-condition area shall mean the area within an entire building which is airconditioned through a centralised airconditioning system, such as Occupied Area, common circulation area, etc., excluding the common services area, which is not air-conditioned and basement parking area. |
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​Sinking fund | Created to replace/ upgrade/ add capital goods, including plant & machinery, lifts, pumps, electrical cables, etc |
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​Miscellaneous | Charges like insurance, safety audit fees, professional fees, certification charges, testing charges and Mall décor expenses & printing charges |
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THE RESULTS:
After rigorous deliberations, detailed analysis and continuous communication with the client for over a month, our team at Chandra Wadhwa & Co. presented the following conclusions/ observations:
Redrafting the Costing system per generally accepted cost accounting principles was proposed to secure a true and fair costing mechanism. Thus, cost should primarily be allocated/ identified at the cost centres level and absorbed into the final cost object. For, e.g. as per the earlier system, the G/L expenditure was incorrectly considered as the cost of water. However, following our suggestion, water cost was derived as follows:
ï‚· Water Purchase cost
ï‚· Electricity consumed to run pump
ï‚· Employee cost for person deployed for water pumps
ï‚· Repair and maintenance of water pump
ï‚· Other overheads
Recommended to adopt a more meaningful/ refined basis of allocations. Eg. To replace the leasable area with customer footfall, etc.
Revisit assets sinking fund calculation and certify life of assets by a Chartered Engineer:
Consider salvage cost/ replacement cost/ scrap value in sinking fund calculation.
Calculate Assets sinking fund over a total area rather than common area alone.
Exclude expired CAM assets in the calculation of the sinking fund.
Recover advertisement and promotional expenses from occupiers at an ad-hoc nominal rate (e.g. Rs. XX per sq. ft. of super built-up area) instead of using true cost.
CAM charges were undervalued, and the actual increase in cost is ~10% after implementation of relevant suggestions as provided by our team:
​Areas | Actual Cost Increase/ (Decrease) |
Deployment cost re-calibrated based on true nature of the job | +03% of Earlier Cost |
Repair and maintenance cost allocation revised based on the principle of cause and effect | +25% of Earlier Cost |
Sinking fund calculation correction | -30% of Earlier Cost |
CAM Charges | +10% of Earlier Cost |
FOOTNOTES:
1. ⌃ CAM charges are costs passed on to commercial property tenants to reimburse the maintenance agency for the expenses associated with maintaining the common area of a property. Generally, common area fees are chargeable based on a tenant's square feet area.
FREQUENTLY ASKED QUESTIONS:
What is CAM?
CAM stands for Common Area Maintenance. It is a fee charged by landlords to tenants in commercial real estate for the maintenance and upkeep of shared areas such as lobbies, elevators, parking lots, and other shared spaces.
What is the true cost of CAM?
The true cost of CAM includes all expenses associated with the maintenance and upkeep of common areas, such as cleaning, repairs, maintenance, landscaping, and security. It may also include administrative costs associated with CAM billing and collection.
Can CAM be priced correctly?
Yes, CAM can be priced correctly by considering the actual cost of maintaining and operating the common areas and any administrative costs associated with CAM billing and collection. Landlords can also use an appropriate and transparent methodology to allocate CAM costs among tenants based on their usage of common areas.
What are the challenges in pricing CAM correctly?
Some of the challenges in pricing CAM correctly include the following:
· Difficulty in accurately estimating the true cost of CAM, especially in the case of older properties with ageing infrastructure.
· Differences in CAM costs and usage patterns among tenants can lead to disputes and disagreements.
· The need to comply with local regulations and lease agreements while pricing CAM.
How can landlords ensure that CAM is priced correctly?
Landlords can ensure that CAM is priced correctly by:
Conduct regular audits of CAM expenses to identify any discrepancies or overcharges.
Using a fair and transparent methodology to allocate CAM costs among tenants based on their usage of common areas.
Communicating CAM charges to tenants in a clear and transparent manner, including details of the expenses included in CAM and any administrative costs.
Being open to feedback and suggestions from tenants on CAM pricing and usage.
What are the benefits of pricing CAM correctly?
Pricing CAM correctly can benefit both landlords and tenants by:
Ensuring tenants pay a fair share of the cost of maintaining and operating common areas.
Reducing the likelihood of disputes and disagreements over CAM charges.
Enhancing transparency and trust between landlords and tenants.
Encouraging tenants to use common areas responsibly and efficiently, leading to lower CAM expenses in the long run.
CONTACT US
Reach us if you have any concerns regarding cost management accounting issues in your organization.
SANKALP WADHWA
Partner, Chandra Wadhwa & Co. (Cost Accountants) | B.Com, FCMA, ACA, DISA | Certified SAP-CO Consultant | Executive Program on Management and Finance (IIM, Ahmedabad)
Address: 1305 & 1306, Vijaya Building, 17, Barakhamba Road, New Delhi - 110001, India Mail: sankalp.wadhwa@cwcindia.in
Tel: +91-8800018190, +91-7503703599.
Website: www.cwcindia.in