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13 Tips to a Successful Reconciliation Review



It's about that time of year: CAM Season. The magical time of year when the Operating Expenses for the year are reviewed and "true-up" billings are sent out. Here are a few tips to make sure you're successful in either your preparation or review of the billing.

 

1. Get your lease

It should go without saying, but your Lease Agreement is what governs the billing methods for Operating Expenses, Real Estate Taxes, and Insurance. Without it, how can you tell if the bill is correct?


Your Lease documentation should be securely stored and easy to access when you need it. Some folks rely on abstracted notes when dealing with Reconciliation reviews, but those notes can become out-of-date quickly.


2. Pro-rata (Proportionate) Share

Typically, pro-rata share is the square-footage of the space divided by the total Gross Leaseable Area (GLA) of the overall property. In some cases, though, it will vary from that simple calculation.


At some properties, you may have a larger tenant who pays for their own Real Estate Tax parcel. In those instances, the Landlord may reduce the GLA to remove the tenant paying their own parcel. Any reduction in GLA means tenants will have a higher pro-rata share.


Also, some leases will dictate that the share is a specific percentage, or that the numerator (space square footage) or denominator (GLA) are stated and will not change.


Make sure you know how to calculate the pro-rata share as calculating this incorrectly will drastically change your billing.


3. CAPs

CAPs are limiters. Simple, but sometimes very complicated, limiters. Use of a CAP indicates that a either part or all of the Operating Expenses can only increase to a certain limit in each billed year.


A standard scenario may be that Operating Expenses may not increase more than 5% over the prior year. So, when doing your calculations you'll need to know the prior year information (see #13).


You may also see "Controllable" or "Non-Controllable" in your Lease. Controllable expenses are those items that a Landlord may reasonably have control over. Some examples are Landscaping contracts, Security, Janitorial, etc.


Non-controllables are typically (but not always) Real Estate Taxes, Insurance, Utilities, and Snow Removal. Those are costs that a Landlord cannot dictate as outside parties, factors, and environment all play a role in the pricing.


Not applying a CAP is one of the most common billing errors. Not calculating it correctly is another one!


4. Base Years

Base Years act as a $0 point for Operating Expenses, Real Estate Taxes, and/or Insurance. When setting a base year, it's usually because the Rent obligation already includes tenant cost of that item at that amount. But not always.


If you have a Base Year of $100,000.00 for Real Estate Taxes and the Tax bills for the property are $150,000.00, you'll be paying a pro-rata share of $50,000.00.


When the Lease has a Base Year, make sure to note the year and the amount of the Base Year expense.


5. Exclusions

The Operating Expenses (or Common Area Maintenance) portion of a Lease can sometimes be written so vague that it can be implied that the Tenant is meant pay any kind of expense the property incurs.


Tenants can negotiate exclusions into this area Lease if the Landlord agrees that it makes sense. And in many cases they're common sense exclusions, like not paying for Elevator repairs when you're a first floor tenant.


Regardless, the Lease should be reviewed for exclusions each year.


6. Administrative Fees

Number 6 and 7 may sound the same but they're really different. Administrative Fees are a cost or percentage basis that is being charged for the Landlord's administrative costs of the property. That may include file storage, software, tenant relations, etc. It's an ambiguous number and typically this is percentage added to the bill (i.e. 10%).


I've also seen where administrative costs are listed under an expense account within the billing as General & Administrative Costs.


However this number is determined, make sure it conforms with the Lease's handling of administrative fees.


7. Management Fees

Management Fees are a bit different. Where administrative costs typically deal with the Landlord's internal business costs, a management fee deals with the management and operating of the property or asset.


Some times this management fee is a percentage of Rent. Other times this may be a management fee that the Landlord is paying to a third-party property management company.


It is not uncommon or unlikely for a Landlord to charge both Administrative Fees and Management Fees. So long as those expenses are covering different types of work and expenses, it is not "double-dipping". But, as I'll repeat, the Lease determines what's allowed.


8. Audit Rights

Some Tenants have the right to audit a reconciliation within their Lease. While many times the Lease requires that an auditor be sent to the Landlord's corporate headquarters to complete the audit, the digital age has made desktop audits much more common.


The audit rights of a Lease will govern how soon after the bill is sent that a Tenant may cause for an audit of the billing. Some Lease language will also allow for the Tenant to be reimbursed for the audit costs, should the discrepancy exceed a certain threshold.


Tenants with audit language that can wind up costing the Landlord money, make it imperative to ensure the bill goes out properly the first time. And any Tenant with an audit right should make sure they address any issues within their given window.


9. Property / Real Estate Taxes

You'd be surprised how often incorrect tax parcels, incorrect amounts, or other situations occur around Property and Real Estate Taxes when completing Reconciliations.


Not only is it important to make sure the tax parcel included in the billing is the appropriate one for the property, but also the amount that the Landlord paid. In some jurisdictions, there is an early pay discount that can fluctuate based on payment date. If a Landlord took a 4% discount because they paid early, the Tenant should also see that 4% discount in the amount being billed.


10. "Miscellaneous"

Myth: If an expense is listed as "miscellaneous", it must be passed-through.

Fact: Listing a charge as "miscellaneous" is the easiest way to spot an expense that needs to be reviewed further!


If the Lease allows for audit, these ambiguous expenses will undoubtedly be subject to that audit scrutiny. A lot of times it's not an underhanded trick by the Landlord, it's just a miscommunication on where to code an item that didn't get resolved before the bill went out.


11. Capital Expenditures

Capital Expenditures are large dollar improvement projects at a property or asset. If I patch a pothole in the parking lot, that's not a capital expenditure. But if I go ahead and spend $300,000 repaving my Shopping Center, that sure is a likely candidate.


Typically, the Landlord will amortize (or break up) the cost over several years based on Generally Accepted Accounting Principle (GAAP). The term "useful life" comes into play here.


That $300,000 might get amortized over 7 years, meaning that expense would be $42,857.14 (I didn't include interest) per year for the Reconciliations forthcoming. It's a way of not overloading Tenants. As a Tenant, you'd likely rather pay your portion of that expense over 7 years than be hit with the whole amount in one year.


Let's a assume a pro-rata share of 10%. I'd have to pay $30,000 in one year if it wasn't amortized, or I could pay $4,285.71 each year for the next 7 years.


12. Estimates: Billed versus Paid

Another area that sees a lot of attention is the Estimates that were paid in during the year. A Tenant will be paying a certain dollar amount each month for their estimated share of the full year bill. Similar to having taxes taken out of your paycheck that are offset against your income tax obligation for the year.


Most Landlords will create the bill showing the "Billed" estimates for the year. If the Tenant over or under paid those estimates, this is typically reflected on the Tenant's account ledger and is cleared up after the billing.


I've worked with clients in the past who have dramatically overpaid their estimates only to see that they are billed a large amount at the end of the year. They go ahead and pay the amount due, without realizing they have a credit on the account. So now the Reconciliation is paid off, but the Landlord is still left with a credit on the Tenant's account ledger to clear up.


Reconciliation time is also a good time to do some housekeeping on your Tenant account ledger.


13. Last Year's Reconciliation

Looking at last year's Reconciliation is a great way to spot issues.


Have the expenses gone up dramatically? Are there new expense categories that weren't there last time? Did my pro-rata share change? Was the CAP calculated properly?


There are many questions that can be addressed just by looking at this year's reconciliation in comparison to last year's. Doing so will also give you a head start on items to dig further into.

 

Conclusion

Reconciliations can incorporate many different calculations to come up with the overall amount due or credit. Spending some extra time making sure you understand how these items are calculated based on the Lease and investing time in the review will ensure a positive outcome.


Sound Off!

Did I miss anything you think should be added to this list? Be sure to leave a Comment in the section below.

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