Unlike past economic challenges, COVID-19 has an immediate, broad effect on the CRE business. Figure out how and why this is extraordinary, along with “industry professionals predictions” on what the post–COVID-19 recuperation could resemble.
If you handle property accounting for commercial real estate, especially retail or office tenants, you’ve probably run across the challenge of managing real estate expense recoveries. These costs don’t fit into your efficient 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 common costs that a landlord passes on to its tenants and subsequently recovers by generating an invoice to the tenant for their pro-rata share. Recuperations are additionally referred to as outgoings or Common Area Maintenance (CAM) charges. These shared expenses can include utilities, services, repairs, maintenance, waste, energy, water sewer, merchant processing, telecom, shipping, property taxes, insurance, and other additional expenses.
Tenant leases often include provisions that outline their responsibilities for paying a portion of shared property costs. Net leases and gross leases take different approaches to this:
- Net Lease: A rent wherein there is an arrangement to pay, notwithstanding base lease, 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 costs
Challenges of managing recoveries
Without cautious arranging and detachment of recoverable and non-recoverable items in your chart of accounts, managing real estate recoveries will be complex this year— in some cases, one GL may be tied to more than one structure, making it hard to monitor the costs that are one of a kind to each building.
“Efficient and effective” has become the mantra of choice for busy commercial real estate owners and managers. Nowhere is this more applicable than in lease administration, particularly in current challenging times when survival can rely on successfully collecting money due, and accurately managing revenues and pass-through.
The commercial real estate industry forfeits billions of dollars of revenue each year. Why? Because the lease terms that entitle them to recover operating expenses from tenants are frequently interpreted, calculated, charged, and applied erroneously.
A surprising number of real estate professionals still calculate expense recovery manually, without a high degree of automation. Many utilize spreadsheets- which generally go actively against the industry’s drive toward embracing technology and the mantra of efficiency and effectiveness. According to NAREIT statistics, only 70 to 80 percent of eligible operating expenses are recovered due to errors and associated administrative costs.
To begin with, the cost to calculate accurately can be significant, particularly for companies with large portfolios. Tenant recoveries represent approximately 25 to 33 percent of gross revenues for commercial real estate companies. Employees can spend countless hours shuffling through formulas to accommodate changes through the life of a lease. Worse yet, unavoidable human error can lead to costly omissions and mistakes.
While this is true across commercial sectors, it is particularly applicable to the highly specialized, complex retail management field. So much of retail lease administration hinges on the issue of recoveries involving a percentage of sales, taxes, operating costs, utilities, and other items. Tremendous variation exists in lease terms, based on an assortment of factors that impact how much each tenant will pay. Administrative fees, too, differ considerably from those typically incurred in office properties.
In a typical office building, the percentage of operating expense reimbursement is stipulated in the lease agreement. In a shopping center, however, a tenant’s reimbursement percentage is generally based on a formula. While the numerator of such a method is straightforward, the denominator’s formula is often quite complex. These denominator formulas will typically contain excluded areas and occupancy factors within the calculations.
Much of the complication arises out of the need to adhere to recovery terms dictated by anchor tenants. It creates a strain on calculating the formulas for the anchor as well as the smaller tenants. A Shopping Center manager might very well end up with 40 different denominator calculations for 40 different tenants. The estimates are further complicated if – as has happened in the current economic downturn – vacancies rise dramatically.
*Commercial property management software helps increment productivity, diminish costs, and expand portfolio execution.
What the experts say
So how can an Owner/Manager easy the blow of loss recovery both internally and externally?
You guessed it by driving more efficiencies and effectiveness without more work! Many are now turning to specific third party experts in an extra effort of loss recovery and softening the blow on both the property and the tenants.
CRE managers as they deal with the cost recovery of a tough 2020
Commercial real estate is particularly sensitive to utility costs, as tenants’ needs must be met while controlling costs. If you own or manage shopping centers, multifamily residential units–apartments, condominiums, student housing, affordable housing, manufactured homes, or military housing–you are probably involved in procuring, contracting, managing, and billing. Utility expenses for these properties can be substantial, so most owners look for effective ways to manage these costs.
While there can sometimes be advantages to managing utilities”in-house,” expert management companies have invested extensively in software tools, trained staff, and technologies to streamline this process. It is an efficient, well-supported process that can be easily outsourced, saving property owners and managers’ significant time, effort, and money.
What’s Involved in an Audit?
Most audits involve the auditing of your waste services, electric, and gas bills. Some include your water and sewer and even telephone bills. A good auditing partner can usually get away with just getting a recent copy of your invoices and your written permission begin the evaluation. With your authorization, they then contact your vendors to get the billing history and account detail. As a rule, the auditing company should already be an expert on your providers. With the bill and some historical data, they can then audit to determine if you are being charged correctly. AND that’s only the tip of the iceberg.
The Audit Will either Save You Money OR Validate you are doing a great job already.
Often, waste, electric, or gas bill audits will result in savings. These savings can be a monthly drop-in fee associated with how you are being charged. These savings might come as a refund or combination of both. Experts estimate that at least 50% of all commercial, manufacturing, governmental, and non-profit organizations are being overcharged each month. Back Refunds can amount to thousands of dollars, even for the smallest of companies. Most overcharges are recurring, which can add up over time, the refunds associated with these can go back thirty-six months. Most companies that provide audits of these services do not charge unless they can save you money. Their fee is usually based on a small percentage of the savings. Therefore, having the audit done is a risk-free endeavor.
The next time you are approached by of these services; don’t be so quick to dismiss their merits, as what they are offering is a legitimate opportunity to save you money on your costs.
CRE companies often outsource Waste and Recycling programs directly to us, and we offer to evaluate, negotiate, secure, manage, and audit every invoice, each month. We are profoundly prepared to manage this for CRE owners and portfolios managers of 10 or more properties.
Want to see a comprehensive list we have complied of services to think about auditing for efficiencies and savings- Request this list
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