In one sentence
The annual true-up comparing estimated operating expense payments collected from tenants against actual costs, producing a billing or a credit.
The longer version
Tenants pay estimated monthly amounts toward common area maintenance, taxes, and insurance. After year end the landlord reconciles estimates against actuals and bills or credits the difference, within whatever caps, exclusions, and gross-up provisions the leases contain.
Lenders care because reconciliations drive a real part of collections and are a frequent source of tenant disputes. A property with a history of contested reconciliations has income that is less certain than the rent roll suggests, which is why the reconciliation history belongs in diligence alongside the leases.
Common questions
- What is a gross-up provision?
- A lease term allowing variable expenses to be calculated as if the building were at a stated occupancy, commonly ninety five percent, so that tenants in a partly vacant building pay their proportionate share rather than an artificially low one.
- Why do reconciliations get disputed?
- Usually over whether a cost is a permitted operating expense or an excluded capital item, over administrative fee calculations, and over caps on controllable expenses.
- Why does a lender review reconciliation history?
- Because contested or chronically late reconciliations mean part of the underwritten income is uncertain, which affects both the coverage ratio and the reliability of the cash flow.
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