What Are Expense Recoveries?

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What Are Expense Recoveries?

Expense recoveries are the amount of money a landlord is reimbursed by tenants to cover operating expenses at a property. Within non-residential real estate - such as retail or office buildings – tenants sign leases with agreements that specify a base rent, which may be calculated as a yearly dollar amount per rentable square foot of space, plus additional expenses. These additional expenses vary, but are most commonly operating expenses like CAM charges, utilities, insurance, and taxes that the landlord passes on to its tenants and subsequently recovers by generating an invoice to the tenant for their pro rata share. 

How is it Calculated?

In order to calculate Expense Recoveries, the landlord estimates annual recovery costs and allocates them between the tenants based on the tenants’ occupied area. These expenses are collected on a monthly basis through rent payments. The following formula can be used to calculate expense recoveries:

Pro-rata Share x (Property Expense – Expense Stop) = Expense Recovery

Where pro rata share is the amount the tenant leases, property expense is the expense charged to the tenant, and expense stop is the fixed amount of operating expense above which the tenant is responsible to pay.

How is it Used in Real Estate?

See below for how expense recoveries are underwritten in our Top Shelf Non-Argus Retail Development Model:

In all our models, the blue cells are input cells. Our rent roll allows for three different types of leases, NNN, gross, and stop amount, determined by the drop-down menu in column I. Each lease type has a different affect on how expense recoveries flow to the monthly cashflow tab. If NNN, like all the leases in the example above, the tenant is responsible for their share of all operating expenses, meaning the landlord is fully reimbursed and the expense recoveries are equal to the total operating expenses in a fully occupied building. If gross, the tenant is responsible for no operating expenses, and the landlord does not recover anything. In this case, the expense recoveries on the monthly cashflow would be zero. If stop amount is selected, column J will populate with a fixed amount that can be changed for each specific lease. This number represents that maximum amount of expenses that are recovered by the landlord. That is, tenants pay for their share of operating expenses up to a certain amount, and the landlord is responsible for the rest. In some cases, the amount, called a “stop amount” is based on the expenses of the property during a base year.  That base year could be the tenants first year of the lease, for example.  

Conclusion

Expense recoveries are the amount of money a landlord is reimbursed by tenants to cover operating expenses at a property. The amount recovered is dependent on the type of lease.

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About the Author

Eric Bergin is the founder of TSM. He realized that there was a need for real estate financial models that were more than just generic templates. He wanted to create a personalized product for his customers that would ensure success for them and their company. Please reach out to him if you have any questions on expense recoveries or if he can help you with your modeling needs.