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Tenant Reimbursements in Commercial Real Estate
Tenant reimbursements, also known as tenant recoveries, are expenses which are paid back to a landlord by a tenant. Common examples of tenant reimbursements include property taxes, property insurance, maintenance and repair costs, and other operational expenses.
- Tenant Reimbursements: What You Need to Know
- Tenant Reimbursements in Relation to Gross Leases
- Tenant Reimbursements in Relation to Net Leases
- Many Commercial Leases Contain Aspects of Both Gross and Net Leases
- Questions? Fill out the form below to speak with a commercial real estate loan specialist.
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Tenant Reimbursements: What You Need to Know
Tenant reimbursements, also known as tenant recoveries, are expenses which are paid back to a landlord by a tenant. Common examples of tenant reimbursements include property taxes, property insurance, maintenance and repair costs, and other operational expenses. Often, landlords will bill the average expected cost of these expenses to a tenant each month, which will often be labeled as “additional rent.” At the end of the year (or the end of the lease) the landlord will reimburse the tenant if actual costs are less than expected costs. Alternately, the landlord will bill the tenant any additional expenses that were not covered by their monthly tenant reimbursement bill.
Tenant Reimbursements in Relation to Gross Leases
In a gross lease, the landlord is responsible for most or all of the expenses of operating and maintaining the property. As a result, tenant reimbursements are rare in gross leases, and will typically only occur if a new expense has cropped up that was not specifically covered (or was specifically excluded) from the terms of the gross lease. In commercial real estate, gross leases are most common for small office tenants, and are relatively uncommon when it comes to larger commercial or retail tenants.
Tenant Reimbursements in Relation to Net Leases
Unlike gross leases, net leases are structured so that a tenant is responsible for their share of a property’s operating expenses. Net leases can come in several different varieties, including double net leases (NN leases), in which a tenant is responsible for paying insurance and property taxes in addition to their rent. They can also come in the form of triple net leases (NNN leases), in which a tenant is responsible for paying insurance, property taxes, and common area maintenance (CAM) fees on top of rent. In some scenarios, a net lease may be structured as a bond lease, also referred to as a “hell or high water lease,” which stipulates that a tenant will need to pay their rent, no matter what happens to the property in question.
In most forms of net leases, especially NNN and bond leases, tenants must pay any unexpected maintenance or repair costs, including the costs of repairing or cleaning the property after floods, snowing, storms, or other natural disasters and weather issues. Tenants are generally responsible for paying their pro-rata share of operational expenses. For instance, if it took $20,000 to clean a property after a storm, and a tenant occupied 60% of the property, they would need to pay $12,000 in tenant reimbursements.
Many Commercial Leases Contain Aspects of Both Gross and Net Leases
While it’s true that pure gross and pure net leases exist, in many cases, commercial leases contain aspects of both. For example, a lease could make the landlord responsible for paying for a building’s property insurance, but could make a tenant responsible for paying a certain portion of CAM fees. In addition, many leases contain what’s called a “stop clause,” which stipulates that a tenant is responsible for paying for certain expenses if they go beyond a certain, pre-set amount. These complexities are why it’s essential for commercial real estate investors to gauge the risks and benefits of different types of leases before deciding on the exact commercial lease structure they want to offer to tenants.
See: Tenant Reimbursement Sample Clauses
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Related Questions
What are the most common tenant reimbursements in commercial real estate?
The most common tenant reimbursements in commercial real estate are property taxes, property insurance, maintenance and repair costs, and other operational expenses. These expenses are often billed to the tenant each month as “additional rent.” At the end of the year (or the end of the lease) the landlord will reimburse the tenant if actual costs are less than expected costs. Alternately, the landlord will bill the tenant any additional expenses that were not covered by their monthly tenant reimbursement bill. Source
What are the benefits of tenant reimbursements for landlords?
The main benefit of tenant reimbursements for landlords is that it allows them to pass on the costs of operating and maintaining the property to the tenant. This can help landlords save money in the long run, as they will not have to pay for all of the expenses associated with the property out of pocket. Additionally, tenant reimbursements can help landlords ensure that tenants are paying their fair share of the costs associated with the property. This can help landlords maintain a healthy cash flow and ensure that their properties remain profitable.
What are the drawbacks of tenant reimbursements for tenants?
The main drawback of tenant reimbursements for tenants is that they can be difficult to budget for. Tenants may not know exactly how much they will be reimbursed until the end of the year, which can make it difficult to plan for their expenses. Additionally, tenant reimbursements can be subject to change if the landlord's expenses increase or decrease, which can lead to unexpected costs for the tenant.
Source: www.commercialrealestate.loans/commercial-real-estate-glossary/tenant-reimbursements
What are the legal requirements for tenant reimbursements?
The legal requirements for tenant reimbursements vary depending on the jurisdiction and the terms of the lease. Generally, the landlord must provide the tenant with a detailed statement of the expenses that are being reimbursed, and the tenant must provide proof of payment for those expenses. Additionally, the landlord must reimburse the tenant within a reasonable amount of time, typically within 30 days of the tenant providing proof of payment.
For more information, please see the following sources:
- Tenant Reimbursements: Landlord Obligations from Nolo
- Tenant Reimbursements from The Balance Small Business
How can landlords ensure tenant reimbursements are properly documented?
Landlords can ensure tenant reimbursements are properly documented by including a clause in the lease agreement that outlines the specific expenses that are eligible for reimbursement, as well as the process for submitting and approving reimbursement requests. Additionally, landlords should keep detailed records of all tenant reimbursements, including the amount of the reimbursement, the date it was paid, and the reason for the reimbursement. This will help ensure that all reimbursements are properly accounted for and that tenants are not overcharged for expenses.
For more information, please see this article on tenant reimbursements.
What are the best practices for negotiating tenant reimbursements?
The best practices for negotiating tenant reimbursements depend on the type of lease you are entering into. In a net lease, it is important to negotiate the terms of the tenant reimbursements in detail, including the types of expenses that will be covered, the amount of reimbursement, and the timing of the reimbursements. Additionally, it is important to ensure that the tenant is not responsible for any expenses that are not explicitly listed in the lease.
In a gross lease, tenant reimbursements are rare, and it is important to ensure that any new expenses that arise are covered by the lease. Additionally, it is important to ensure that the tenant is not responsible for any expenses that are not explicitly listed in the lease.
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