A true-up is the annual reconciliation between what a tenant paid in estimated charges and what the tenant actually owes based on real expenses. It is the process that converts estimates into actuals.
True-ups are the most operationally difficult part of commercial property accounting. They require a full year of expense data, correct application of lease terms, and accurate tenant allocation. They are also the process where the most revenue is lost, because the errors are discovered after the year is closed.
This article explains how true-ups work, why they fail, and how to automate them.
What Is a True-Up?
During the year, tenants pay estimated monthly charges for CAM, taxes, and insurance. The estimates are based on budgeted or prior-year expenses. At year-end, the actual expenses are known. The true-up reconciles the estimates to the actuals.
If the tenant overpaid: The property owes the tenant a credit or refund.
If the tenant underpaid: The tenant owes the property an additional payment.
The true-up is not optional. Most leases require it within a specific timeframe, usually 90 to 120 days after year-end.
The Three True-Up Types
1. CAM True-Up
The CAM true-up reconciles estimated CAM payments to actual CAM expenses.
Process:
- Aggregate all CAM expenses for the year
- Remove excluded expenses per the lease
- Apply the controllable expense cap if applicable
- Calculate the gross-up for vacancy if applicable
- Determine each tenant's pro-rata share
- Compare to estimated payments
- Calculate the true-up
Common errors:
- Excluded expenses are not removed
- The cap is not applied or is applied incorrectly
- The gross-up is not calculated
- The pro-rata percentage is outdated
2. Tax True-Up
The tax true-up reconciles estimated tax payments to actual tax bills.
Process:
- Obtain the actual tax bills for the year
- Apply the base year or cap per the lease
- Determine each tenant's pro-rata share
- Compare to estimated payments
- Calculate the true-up
Common errors:
- The base year amount is wrong
- The tax bill covers a different period than the lease year
- A reassessment is not passed through when the lease allows it
- The cap is not applied
3. Insurance True-Up
The insurance true-up reconciles estimated insurance payments to actual premiums.
Process:
- Obtain the actual insurance premiums for the year
- Apply the base year or cap per the lease
- Determine each tenant's pro-rata share
- Compare to estimated payments
- Calculate the true-up
Common errors:
- The premium is allocated to the wrong policy period
- A mid-year premium increase is not prorated
- The base year is not updated at renewal
- Excluded coverage is included
Why True-Ups Fail
Failure 1: Data Assembly Takes Too Long
The true-up requires a full year of expense data. Invoices are in email, vendor portals, and filing cabinets. Bank statements are in a separate system. The lease terms are in a file. Assembling the data takes weeks. The deadline passes before the data is complete.
Failure 2: The Calculation Is Done in a Spreadsheet
The true-up calculation is complex: multiple expense categories, multiple lease provisions, multiple tenants with different percentages. The spreadsheet has 50 rows and 20 columns. A formula error in one cell propagates through the entire calculation. The error is not found until a tenant audits.
Failure 3: Lease Terms Are Not Applied Consistently
Tenant A has a 5% cap. Tenant B has a 3% cap. Tenant C has no cap. Tenant D has a base year provision. Tenant E has a gross-up requirement. The true-up applies the same calculation to all tenants. The caps and base years are wrong for half of them.
Failure 4: The Statement Is Not Documented
The true-up statement shows the amount owed. It does not show the expense detail, the lease clause that authorizes the charge, or the calculation method. The tenant disputes the charge. The property cannot produce the documentation. The dispute is resolved in the tenant's favor.
Failure 5: The Deadline Is Missed
The lease requires the true-up statement within 90 days of year-end. The data assembly takes 60 days. The calculation takes 30 days. The review takes 15 days. The statement goes out on day 105. The tenant argues the deadline was missed and the true-up is waived.
The Permanent Loss
A true-up error is permanent for two reasons:
The dispute window closes. Most leases give the tenant 30 to 90 days to dispute the true-up statement. If the property does not issue the statement, or issues it with errors, and the tenant does not dispute, the amount is final.
The audit right expires. Most leases give the tenant the right to audit the reconciliation for a limited period, usually 1 to 3 years. If the property discovers its own error after the audit period expires, the property cannot recover the underbilling.
The Automated True-Up
Lease-specific calculation. Each tenant's true-up is calculated using their specific lease terms: their cap, their base year, their exclusions, their pro-rata share.
Automatic cap enforcement. The cap is applied as expenses are incurred. The year-end cap calculation is already done.
Automatic gross-up. Variable expenses are grossed up to full occupancy as they are recorded. The year-end gross-up is already done.
Documented statement. The true-up statement includes the expense detail, the lease clause citation, the calculation method, and the approval history. The documentation is generated with the statement.
Conclusion
The annual true-up is the process that converts estimated charges into actual charges. It is the most operationally difficult part of commercial property accounting because it requires a full year of data, correct application of complex lease terms, and accurate allocation to multiple tenants.
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