[numberguru]

Triple Net Lease Conflicts

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Retail businesses in a Triple Net Lease are responsible for reimbursement of expenses for building maintenance and upkeep, which is split based on square footage of leased space with all lessees. When the property management claims gross operating revenue, is this revenue before the deducting the reimbursed expenses or does it include the reimbursed expenses as part of the revenue.

This question is asked because the property management company is claiming the reimbursement as income to base their 5% management fees on.

In my opinion the Gross Operating Revenue should only be based on all other income, which includes rental income. I feel that the reimbursed expenses should be deducted before the management fees are calculated, since 5% of '0' is 0.

My question is which revenue should the management fees be based on: the gross operating revenue less reimbursed expenses or gross operating revenue including the reimbursement of the expenses?


Quote:
"Quote Morgaine 300"

Well, I can't see a contract to know exactly what's going on here, nor am I a lawyer, which is what you maybe really need for this case.

However, if this is truly a reimbursement, it isn't income or expense. It's a reimbursement. As these expenditures are made, they could all be put into a receivable from the leasees, and then the pro-rating done at month-end or whenever, and when they get the money back, take it off the receivable. I actually work for a property management company once, but can't recall how they even handled this.

If they had some legitimate reason to count this as income (say, it's not a true reimbursement), I think it would be pretty jerky of them to count it as income for the sake of the 5% management fees. Those fees should be based on operating revenues.

That's my opinion. If you are personally involved and have a disagreement, I seriously mean it when I say you should probably go the legal forum and ask someone there. You've really got more of a legal question than an accounting question. They don't necessarily coincide. (If I'm blackmailing my neighbor, accounting says I could count that as "other" income, but it doesn't make it legal. Drug dealers are only allowed to count cost of goods sold as an expense on their taxes. Isn't that a hoot?)

[LisaB4657]

My opinion is that gross operating revenues should not include the reimbursements, since they are not revenue. But you need to carefully read the terms of the management contract, particularly if the contract contains a definition of revenue, to be sure.

[numberguru]

That is part of my problem, they are not defining the gross operating revenue in the lease, it was not until I did an audit of the expenses in their office that they informed the lessee of how the fees are figured.

[LisaB4657]

First step - check with an attorney (and an accountant) in your area to confirm that your understanding is correct. Second step - send them a letter by certified mail, return receipt requested, informing them that they are calculating it incorrectly and demanding a refund of all overpayments within 10 days. If they refuse, or if they don't respond within the 10 days, send them another certified letter where you declare the contract null and void due to their breach and then file a lawsuit.