Common area maintenance (CAM) costs are expenses incurred by a landlord to maintain or manage common areas in places like shopping centers or office buildings. For example, a parking lot in a shopping center or the lobby in an office building requires periodic maintenance, which is shared by the tenants who utilize those areas.
Commercial real estate managers with retail or office space almost always have CAM costs, and need to be aware of a significant new accounting rule that affects how they are reported.
CAM costs can be set up as a flat fee per month, or can be allocated based on the respective square footage under lease. For instance, it wouldn’t make sense for a small nail salon to pay the same CAM expenses as a large anchor tenant such as a grocery store. Typical CAM costs are maintenance and repairs for parking lots, landscaping, snow removal, cleaning, elevators, hallways and security.
How Are CAM Costs Accounted for Under the New Lease Standard?
For privately-held companies that follow GAAP, accounting for CAM is about to change significantly with FASB’s Accounting Standards Codification (ASC) 842, Leases. This new lease accounting standard comes online for fiscal years beginning after December 15, 2021. While the new lease standard is required for any business with at least one lease, note that companies following the income tax basis of accounting are exempt from the implementation of this new standard.
Prior to ASC 842, a tenant (lessee) that had a lease with the landlord or property manager (lessor) would have recorded CAM charges as expenses in their books and deducted them on the business’s tax return. Under ASC 842, lessees must apply certain criteria to determine whether a contract that contains a lease includes a lease component and one or more non-lease components that should be accounted for separately. CAM costs can be treated two ways:
- As a non-lease component: CAM is not considered related to securing the use of the tenant’s space, and is expensed on the profit and loss statement. If there are any variable components to CAM that are not known upfront, these are expensed as well.
- As a component of the lease: To do this requires electing a practical expedient (AKA, a shortcut) that allows you to include the CAM costs with the lease costs, thus simplifying the process and calculations. This election must be done for each class of underlying assets such as buildings or equipment.
How Do You Decide Which Option Is Best?
Why would you choose one of these options vs. the other? The new lease standard requires an analysis to be conducted on the components of each lease, which can be time-consuming and tedious. If CAM is not material, or is difficult to measure/predict, it may be simpler to choose the practical expedient and lump everything together. However, if CAM is significant, this means that the corresponding lease asset and liability will appear on the balance sheet at a larger amount.
Need Help?
CAM is only one consideration when implementing ASC 842, with significant judgment involved in this process. Consult with your CPA to help guide you through this decision.
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