Operating expense reconciliation: a landlord's step-by-step guide

An operating expense reconciliation compares what each tenant paid in monthly estimates for the building's operating costs with its actual share of those costs for the year, then bills the difference or credits it back. Office leases usually call it an operating expense or OpEx reconciliation; retail and NNN leases usually call the same job a CAM reconciliation.

This guide is written for the landlord, owner or property accountant who prepares it. The steps are the same whichever name your leases use, but office leases add one term that changes the arithmetic: the base year or expense stop.

What does an operating expense reconciliation include?

It includes every cost the leases let you recover, grouped into pools, and each tenant's share of each pool. Typical pools are common area maintenance, utilities serving the common areas, real estate taxes, insurance and a management or administrative fee.

What counts as recoverable is set by each lease, not by a general rule. Leases commonly exclude capital improvements, mortgage interest, depreciation and leasing commissions, but the list differs lease to lease, so read the operating expense definition in each one.

How do you run it, step by step?

Run the same seven steps for every tenant, in the same order:

1. Export the year's general ledger detail from your accounting system as CSV or Excel. Set aside lines dated outside the reconciliation year.
2. Sort each account into a pool: controllable CAM, non-controllable costs such as utilities, taxes, insurance, or not recoverable. Check that the pools add up to the ledger total, less what you marked not recoverable.
3. Remove each lease's excluded accounts from that tenant's pools.
4. Gross up variable costs if the lease allows it and the building was less occupied than the lease's gross-up level.
5. Apply the tenant's share to each pool, prorated by days for a tenant that moved in or out during the year.
6. Apply caps, the administrative fee, and the base year or expense stop as the lease defines them.
7. Subtract the estimates billed during the year. A positive result is a balance due; a negative result is a credit.

The CAM reconciliation guide explains each step in more depth, and the CAM reconciliation example works them for one tenant with real arithmetic.

How does a base year change the math?

A base year means the tenant pays only its share of the increase over the costs in a named year. If a tenant's share of operating expenses was $18,000 in its base year and $19,500 this year, it owes $1,500 for this year, before estimates are subtracted.

An expense stop works the same way with a fixed amount per square foot instead of a year's actual costs. A tenant of 3,000 square feet with a $6.00 stop pays its share above $18,000. Either way, if this year's costs fall below the base, the tenant owes nothing for the year, not a negative amount; check your lease for anything different.

Leases differ on whether the cap and administrative fee are applied before or after the base year is subtracted, and the two orders give different totals. Write down the order your lease uses and apply it the same way every year.

Do operating expenses need to be reconciled each month?

No: the reconciliation itself is yearly, but checking the estimates monthly avoids a large surprise at year-end. The tenant pays a monthly estimate during the year; the reconciliation after year-end settles the difference.

A monthly check takes the year-to-date ledger, projects each pool to a full year, and compares the projected share with the estimates being billed. If a tenant's projection is running well above its estimates, raise the estimate now, if the lease allows, rather than send a large balance in the spring.

What goes on the statement to the tenant?

The statement shows enough for the tenant to follow the arithmetic without calling you. Include:

• the property and the period;
• the tenant's share and how it was found;
• each pool's total and the tenant's portion;
• exclusions, caps, gross-ups and the base year or stop applied, with amounts;
• the administrative fee and what it was charged on;
• the estimates billed;
• the balance due or credit, and when it is payable or applied.

The CAM reconciliation letter guide has a template you can adapt for an operating expense statement. When the statement is due is usually set by the lease; many leases name a number of days after year-end, so check each one.

Where do operating expense reconciliations usually go wrong?

They usually go wrong in the inputs, not the arithmetic. The most common causes:

• an account mapped to the wrong pool, or a capital item expensed into a recoverable pool;
• the wrong denominator for the tenant's share;
• the rent roll's scheduled estimate used instead of the amount actually billed;
• a cap or base year carried forward from the wrong prior-year figure;
• one tenant's exception copied to another tenant's row.

Keep the ledger detail behind every pool. A tenant may ask to audit the reconciliation, and the time to review allowed is usually set by the lease.

Doing it for every tenant

CAM Rec runs these steps for office and retail leases alike: you upload the general ledger export and the rent roll, assign accounts to pools once, and enter each lease's terms, including a base-year amount or an expense stop per square foot. It shows every calculation line, holds the property as a draft until you approve it, then produces a letter PDF per tenant and a backup ZIP. During the year you can upload the year-to-date ledger to see which tenants' estimates are running short. The sample runs on a fictional strip center with no sign-up. If you are still deciding between a workbook and a tool, see CAM reconciliation spreadsheet vs CAM Rec.

FAQ

Do operating expenses need to be reconciled each month?

No. The reconciliation with tenants happens once a year, after the books close. A monthly look at year-to-date costs against estimates is good practice, because it lets you adjust estimates before a large balance builds up.

How do you do a GL reconciliation for operating expenses?

Total each pool from the general ledger detail and check that the pools, plus the accounts marked not recoverable, equal the ledger total for the year. A difference means an account was missed, counted twice, or dated outside the year.

What does an operating expense reconciliation example look like?

It is a table per tenant: each pool's property total, the tenant's share of it, caps and fees applied, the base year or stop subtracted, and the estimates billed, ending in a balance due or credit. The CAM reconciliation example works one through with figures.

This is general information, not legal or accounting advice. Your lease governs every term.