Net lease reconciliation guidance

A growing number of net lease investments have the tenant remit payment for expenses to the landlord as estimated monthly payments, and require the landlord to pay the expenses themselves.

This process may be challenging, because it requires investors to source vendors for common area maintenance and insurance, and to pay property taxes on time.

At the end of the year these landlords must perform a reconciliation with the tenant to true up, or reconcile, the difference between the estimated amounts paid monthly by the tenant, and the landlord’s actual expenses.

This administrative responsibility can create burdens for landlords, and tenants understand that there are frequent miscalculations, failures to submit the reconciliation request within the proper time, and the effects of time value of money.

There have been instances where we have taken over management of this process from CPAs and other management firms, and found 10% or higher errors in the tenant’s favor on prior year calculations after reviewing the lease and reconciling the tenant payments and landlord expenses.

Landlords must ensure that their agents have a firm understanding of the lease and detailed record keeping processes to prevent a loss of income during the reconciliation process.

A professional abstraction of the lease helps provide clarity for landlords, and makes it less likely that important details are missed.

Please see our plans page to explore lease abstraction and management services that could help you with net lease reconciliation.