How Does Your Landlord Handle Refunds?
Are refunds an operating expenses?
Believe it or not, landlords sometimes get refunds for various items. How do those affect you, and are you eligible to participate in any such windfall? For a global, noncommittal answer—it depends.
Depends on what? Let's say your expenses are defined as a base year rate of $8.00 per square foot per year. As an efficient businessperson, your landlord goes back to one of his major vendors and requests a specific reduction in costs, which occurred during the previous year. The year in which that questionable expense occurred caused the total operating expenses to go up to $8.24 PSF. Consequently, you would be obligated to pay $.02 per month in additional expenses.
Let's say though, that the appeal for a reduction was granted, which lowered your obligation to $12 PSF. What happens to that $.01 PSF you already paid the landlord? Let's say the appeal lowered the building operating expenses to $7.90 PSF. How should each scenario be approached?
In the first, the correct thing to do would be to refund to you the full $.01 PSF you already paid in. In the second scenario, you should be refunded only $.24 PSF. Why? Your rent as used in our example included $8.00 in expenses and $10.00 in other costs. You are obligated to pay at least that $18 per month. If the total of operating expenses ever dips below your first year’s base operating expense amount, you are not eligible for any refunds. Rather, it is the landlord who gets to keep that difference as a benefit for good management.
How can you tell if the landlord is charging you correctly for operating expenses? Start with a review of your reconciliation statement.