If you handle property accounting for commercial real estate, particularly involving retail or office tenants, you’ve probably run across the challenge of managing real estate expense recoveries. These expenses don’t fit nicely into your well-organized GL, and they typically require manual tracking of complex reconciliations. So, what exactly are real estate recoveries, and what’s the best way to manage them?
What are real estate recoveries?
Commercial real estate expense recoveries and retail recoveries refer to the shared expenses that a landlord passes on to its tenants, and subsequently recovers by generating an invoice to the tenant for their pro-rata share. Recoveries are also referred to as outgoings or Common Area Maintenance (CAM) charges. These shared expenses can include utilities, services, repairs, maintenance, property taxes, insurance and other additional expenses.
Tenant leases often include provisions that outline their responsibilities for paying a portion of shared property expenses. Net leases and gross leases take different approaches to this:
- Net Lease: A lease in which there is a provision to pay, in addition to base rent, certain costs associated with the operation of the property.
- Gross Lease: A lease in which the tenant pays a flat sum for rent, out of which the landlord pays all recovery/CAM expenses
Challenges of managing recoveries in accounting
Without careful planning and separation of recoverable and non-recoverable items in your chart of accounts, the process of managing real estate recoveries will be complex. Property accountants should choose standardized codes and nomenclature to identify and group recoveries together. This can make the process easier, but exceptions and inconsistencies will occur — in some cases, one GL may be tied to more than one building, which makes it difficult to keep track of the expenses that are unique to each building.
How to manage retail recoveries
MRI Commercial Management clients have access to retail recoveries tools that make it easier to calculate and process complex reconciliations. Let’s take a general look at the steps involved in billing for recoveries using MRI.
Calculate monthly recoveries and estimates
The recoveries process begins with calculating monthly outgoings and estimates, which is typically performed at the end of budgeting season. First, we’ll need to create the budget for the next year, based on the pro-rata share for each tenant, then create invoices to the tenants based on that estimate. At end of year, we’ll reconcile those estimates and adjust them based on actual figures, while taking into consideration any provisions in the lease agreement.
- Get GL expenses – Based upon building-level recovery profiles, load the actual figures for accounts into each of the expense pools.
- Make adjustments to expense pools – Adjustments can be made to each line item in the expense pool.
- Load the estimate worksheet – Each tenant’s unique recoveries profile is applied to the expense pools to calculate out a total forecasted recoveries payment amount along with the monthly estimates.
- Make adjustments – Adjustments and overrides can then be made at the tenant level.
- Bill next year’s estimate charges – Raise the charges on each tenants’ account using the recoveries estimate income category. This will now sit in the recurring charges table on each lease and will be invoiced as part of your normal monthly invoicing process.
- Generate recoveries invoice – Run a report outlining the details surrounding the estimate for next year that can be sent out as a letter to the tenant.
Perform annual recoveries reconciliations
These steps are typically performed a few months after year-end close. Follow the same steps from above, but this time, bill the actual reconciled amount due instead of next year’s estimates. Raise the charges on each tenants’ account using your calculated reconciliation amount. This will be added to the tenants ledger as a one-time charge/credit and will get picked up in the next invoice process.
Are you tasked with managing retail recoveries? If you’re already using MRI Commercial Management and accounts payable software, the additional retail recoveries functionality can automate the billing process and shorten the time it takes to perform a reconciliation. Smooth out the cashflow for annual property expenses with estimated monthly billing and generate detailed invoices to your tenants, all while eliminating errors and providing evidence to support calculations.
To see best practices for how to set up retail recoveries in your MRI system, watch the webinar here.