What Is an Operating Expense Reconciliation, and Why Should You Review Yours Carefully?
In commercial real estate leases, tenants often pay a share of the property’s operating expenses in addition to their base rent. These operating expenses can include things like property taxes, insurance, maintenance, and utilities. At the end of each year, landlords perform an operating expense reconciliation to compare the estimated costs they charged tenants throughout the year with the actual expenses incurred.
If the actual costs were higher than the estimates, the tenant may owe the landlord the difference. If the actual costs were lower, the landlord may owe the tenant a refund or credit.
Why Is It Important to Review Operating Expense Reconciliations?
- Accuracy Matters
Mistakes can happen. Operating expense reconciliations may include errors in calculations, incorrect allocations, or charges for items that shouldn’t be included under your lease terms. A careful review ensures you’re not overpaying. - Lease Compliance
Your lease agreement dictates what expenses can and cannot be passed on to you. Reviewing reconciliations ensures landlords comply with those terms and helps identify any discrepancies. - Cash Flow Management
Unexpected charges from an inaccurate reconciliation can disrupt your business's financial planning. Regular reviews allow you to spot and address issues early. - Negotiation Opportunities
Finding errors or questionable charges can open the door to discussions with the landlord about adjustments or more favorable terms in the future.
How to Review Operating Expense Reconciliations
- Check the Lease: Understand what expenses are allowable under your specific lease.
- Request Supporting Documents: Ask for detailed records of the actual expenses to verify accuracy.
- Verify Allocations: Confirm that your share of the expenses aligns with the agreed-upon allocation, often based on square footage or other metrics.
- Consult Professionals: Lease auditors or real estate attorneys can help identify hidden issues or complex errors.
Final Thoughts
Operating expense reconciliations are more than just numbers—they directly impact your business’s bottom line. Reviewing them carefully ensures fairness, compliance, and cost control, making it a critical task for any commercial tenant.
Pro Tip: Regularly reviewing reconciliations not only prevents overpayments but can also strengthen your relationship with your landlord by fostering transparency and accountability.
