Real Estate Accounting Made Easy, 2nd Edition

6OPERATING EXPENSE RECONCILIATION AND RECOVERIES

As was discussed in Chapter 4, certain tenant leases may require that the tenant pay a minimum base rent in addition to its prorated share of operating expenses. This chapter discusses the types of expenses that can be recovered from tenants and the reconciliation process involved.

The typical lease that requires tenants to pay their prorated share of operating expenses normally requires that during the course of the year, tenants pay the landlord an estimated prorated share monthly. At the end of the year, when the actual operating expense can be determined, the landlord performs a reconciliation of operating expenses and refunds or bills tenants for overpayments or underpayments. In some instances, large tenants may require the landlord to pay interest on any overpayment in the estimate after an agreed-on threshold. The interest rate is normally agreed to by the parties and is specified on the lease.

Not all costs incurred by the landlord are recoverable from tenants. What is recoverable or nonrecoverable depends on what the parties agree to. For example, some retail tenants may negotiate that any costs related to the building's elevator should not be included in recoverable operating expense since, if the tenant is on the first floor, it would not have any use for the elevator. However, if the lease is silent on this issue, some landlords may include elevator-related costs in recoverable operating expenses.

MOST COMMON ...