Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Nonrecoverable Expenses

As shown above, usually there is not a one-to-one correspondence between the total operating expenses and the operating expenses paid by the tenants. Usually there is some “slippage.” In our hypothetical example, the total operating expenses are $456,499, yet the total expense reimbursement comes to $216,636.

In addition, there are often some expenses that are not recoverable expenses. For example, national tenant leases will often exclude management supervision as a recoverable expense. Also, the costs associated with running the owner's business are not expenses recoverable by the landlord. These expenses do not relate directly to operating the real estate asset and vary greatly depending upon the nature of the owner's operation. Consequently, these expenses are usually not reflected in a broker's sales package. Typical nonrecoverable expenses include administrative and office expenses, postage, office supplies, FedEx and courier charges, and legal and accounting services.

Given the reasons outlined above, the nonrecoverable expenses are not shown in the hypothetical example, but they should not be ignored. They are a real cost of doing business. It should be understood, however, that the management fee may absorb in part or in full the cost of the nonrecoverable expenses associated with running the owner's business.