Depreciation in CAM Charges: An Accounting Entry That Should Not Cost You Money
Depreciation is not a cash expense. The landlord does not write a check for depreciation. It is an accounting entry that spreads the cost of a capital asset over its useful life on paper. When landlords include depreciation in your CAM reconciliation, they are passing through a phantom cost, and most commercial leases explicitly prohibit it.
This distinction matters because the lease is meant to recover actual operating costs, not non-cash accounting adjustments. When depreciation appears in a reconciliation, it is either a mistake or an intentional overcharge.
Most commercial leases exclude depreciation from CAM by design. Including it would allow the landlord to recover the original cash cost of a capital asset (through a lump-sum payment or amortization) and then also recover a non-cash book entry for the same asset year over year. That is double recovery, and courts have consistently rejected it.
40% of CAM reconciliations contain at least one billing error, with non-cash accounting entries like depreciation among the most overlooked categories (Tango Analytics, 2023)
What Depreciation Is and Why It Appears
Under generally accepted accounting principles (GAAP), when a landlord installs a new roof, replaces HVAC equipment, or builds out a lobby, the cost is not expensed all at once. It is capitalized and spread over the asset's useful life. A $390,000 roof replacement over a 39-year depreciation schedule generates $10,000 in annual depreciation expense on the landlord's books.
That $10,000 appears as a line item in the property's operating expense report. Some landlords, intentionally or through accounting error, include it in the CAM pool submitted to tenants.
The problem: the $390,000 cash was already spent. The landlord already has the money (from operations, financing, or reserves). Billing tenants for depreciation would recover the cash cost twice: once when the work is performed (through CapEx amortization, reserves, or cash), and again each year as depreciation.
Standard Lease Exclusion Language
Most commercial lease forms exclude depreciation explicitly:
"CAM shall not include depreciation or amortization of the cost of items which would be capitalized under generally accepted accounting principles."
Or more simply:
"Depreciation of the Building or any part thereof is excluded from Operating Expenses."
If your lease has this language, any depreciation charge is a clear violation. If your lease is silent, you have a strong argument based on the non-cash nature of the expense and the general principle that CAM covers actual out-of-pocket operating costs.
How Depreciation Overcharges Work
Direct Inclusion
The most straightforward version: a depreciation line item appears on your reconciliation labeled "$12,820, Building Depreciation." Rare, because it is easy to spot. More common in portfolios where CAM is managed by accounting teams that export operating expense reports directly without filtering non-cash items.
Bundled in "Building Improvements" or "Capital Recovery"
More common: depreciation is buried inside a broader line item. The landlord runs capital expenses through a depreciation schedule and includes the annual depreciation charge as part of "capital improvements" or "property maintenance." The line item does not say "depreciation" but the underlying math is based on a depreciation schedule.
CapEx Amortization vs. Depreciation
There is an important distinction between depreciation (non-cash) and legitimate CapEx amortization (cash spread over time). A lease may permit recovery of capital costs through amortization: the actual cash cost divided by the asset's useful life, sometimes with interest. That is different from GAAP depreciation.
If your lease permits CapEx amortization, the landlord should show you the original cash cost, the amortization period, and the annual charge. If instead they hand you a depreciation schedule with asset book values and accumulated depreciation, that is the accounting method, not the lease-compliant method.
See also: Amortization of CapEx in CAM Charges for a detailed breakdown of the distinction between permissible contractual amortization and impermissible GAAP depreciation.
Dollar Example
Building: 200,000 sq ft. Your space: 15,000 sq ft. Pro-rata share: 7.5%.
Landlord's reconciliation includes:
- $10,000 building depreciation (roof, GAAP straight-line over 39 years)
- $5,200 equipment depreciation (HVAC, GAAP over 15 years)
- Total depreciation in pool: $15,200
Your share: $15,200 x 7.5% = $1,140.
That is $1,140 you paid for a check the landlord never wrote. Over a 10-year lease: $11,400.
If this is the same asset for which the landlord also charges amortized CapEx, the double-billing is even larger. For the full IRS analysis of when double-billing constitutes a provable violation, see CapEx Amortization IRS Cross-Reference, specifically the section on Schedule E double-dipping.
15-20% of annual CAM spending is recoverable through formal audit, with depreciation charges representing recoverable phantom costs in most mid-size commercial property reconciliations (Springbord Research, 2023)
How to Identify Depreciation in Your Reconciliation
- Look for line items containing "depreciation," "accumulated depreciation," or "book value."
- Request the underlying general ledger report if the reconciliation does not include line-item detail.
- Ask the landlord to provide the expense categorization: is this a cash expense or a non-cash accounting charge?
- Compare the reconciliation line items against the lease's excluded expense list.
- For any "improvements" or "capital" line item, ask for the original invoice and payment date to confirm it represents actual cash spent.
- Flag any line item based on an asset register, depreciation schedule, or book value calculation.
What Documentation to Request
- General ledger detail for the CAM pool, showing all line items and their accounting classification (cash vs. non-cash)
- Fixed asset register for the property
- Depreciation schedules for any assets included in the pool
- Documentation separating GAAP depreciation from contractual CapEx amortization
- Original invoices for any capital items in the pool
After identifying depreciation charges, see CAM Recovery for how to structure a written dispute and calculate the total recovery amount.
Frequently Asked Questions
My lease says CAM includes "all operating expenses." Does that include depreciation?
Courts have generally held that "all operating expenses" does not mean every line on a GAAP income statement. Depreciation is a non-cash accounting construct, not an out-of-pocket operating cost. Unless your lease explicitly says "including depreciation," the broad phrase does not bring it in.
The landlord replaced the roof. Can they charge me for that?
Depends on your lease. Many leases exclude capital expenditures entirely. Some permit amortized CapEx recovery for specific categories (life-safety improvements, energy-saving measures). The distinction is whether the charge is based on actual cash outlays spread over time (potentially permissible) vs. GAAP depreciation (not permissible). Read your lease's capital expenditure section carefully.
I see "amortization" on my reconciliation. Is that the same as depreciation?
Not necessarily. Contractual amortization (cash cost divided by useful life) is different from GAAP depreciation (asset book value written down per accounting rules). Whether lease-permitted amortization is actually being charged, or whether GAAP depreciation is being disguised as amortization, requires reviewing the underlying calculation. See Amortization of CapEx in CAM Charges.
What is the typical dollar impact of depreciation in CAM?
On a mid-size commercial property with $3 million to $10 million in capital assets, GAAP depreciation can run $100,000 to $300,000 per year. At a 10% pro-rata share, that is $10,000 to $30,000 annually. For a tenant in a larger building, the numbers are bigger.
Can I get my money back if I paid depreciation charges in prior years?
Yes, if you are within the audit window specified in your lease (typically 1 to 3 years after reconciliation delivery). Review your lease's audit rights and dispute window. File a written dispute citing the specific lease exclusion language and the amounts involved.
CAMAudit's detection engine flags any non-cash accounting entries appearing in CAM line items, including depreciation, accumulated amortization, and book-value-based charges.
Related: Capital Expenditures in CAM Charges | CapEx vs. OpEx in CAM Charges | Excluded Services in CAM Charges
Frequently Asked Questions
Why is depreciation almost always excluded from CAM charges?
Depreciation is not a cash expense. The landlord does not write a check for it. It is an accounting entry that spreads the original cost of a capital asset over its useful life on paper. When a landlord includes depreciation in the CAM pool, they are passing through a phantom cost. Most commercial leases exclude it explicitly because including it alongside actual operating expenses would allow the landlord to recover the cash cost of an asset twice: once when the capital project was funded, and again each year as annual depreciation.
How does depreciation end up in a CAM reconciliation?
Most commonly through bundling. Depreciation is rarely labeled 'building depreciation' on a reconciliation; it more often appears inside a 'building improvements' or 'capital recovery' line item. Landlords running CAM pools from property accounting systems sometimes export operating expense reports directly without filtering non-cash accounting charges. The result is GAAP depreciation entries flowing into the tenant's bill without being identified as non-cash items.
What is the difference between depreciation and legitimate CapEx amortization in a CAM pool?
Depreciation is a non-cash GAAP accounting charge based on asset book values. Legitimate CapEx amortization (where the lease permits it) is a cash cost spread over time: the actual invoice amount divided by the asset's useful life, sometimes with interest. If your lease permits CapEx amortization, the landlord should show you the original cash cost, the amortization period, and the annual charge. If instead they hand you a depreciation schedule with accumulated depreciation figures, that is the accounting method, not the lease-compliant method.
What is the typical dollar impact of depreciation in a CAM pool?
On a mid-size commercial property with $3 million to $10 million in capital assets, GAAP depreciation can run $100,000 to $300,000 per year. At a 10% pro-rata share, that is $10,000 to $30,000 annually in phantom charges. For tenants in larger buildings with more extensive capital asset bases, the numbers are higher. The overcharge compounds over multi-year leases because the same depreciation entries recur annually as long as the asset remains on the landlord's books.
Can I recover depreciation charges paid in prior years?
Yes, if you are within the audit window specified in your lease, typically 1 to 3 years after reconciliation delivery. Review your lease's audit rights and dispute window. File a written dispute citing the specific lease exclusion language and the amounts involved. For properties with large capital asset bases, multi-year lookbacks can produce substantial recoveries: a $15,200 annual depreciation charge at 7.5% pro-rata share generates $1,140 per year, or $11,400 over a 10-year lease.