# Utility reimbursement income and unrecovered operating costs

Canonical: https://commercialdebtadvisory.com/underwriting/utility-reimbursement-income-and-unrecovered-operating-costs/
Status: Published
Publisher: Jaken Finance Group

Utility reimbursement income is not a substitute for reading the matching expense and collection record. A lease may permit recovery of certain costs without making every utility dollar recoverable, billed, or collected. The useful financing measure is the supported net contribution after the associated expense, with timing differences and exclusions visible.

As a historical reporting example, [Phillips Edison & Company's 2025 lease table](https://www.sec.gov/Archives/edgar/data/1476204/000147620426000005/R33.htm) identifies tenant recovery income within variable lease payments. That presentation does not establish recovery rights at another property. Those depend on the actual leases, applicable rules, and supporting billing records. The original worksheet below connects contract scope to invoices, tenant charges, and cash.

## Define what can be recovered

Create a tenant-by-tenant schedule showing the utility or service, responsible party, allocation method, base year or cap if any, billing frequency, administrative fees, and dispute provisions. Identify vacant space, owner-used areas, common areas, leaks, and costs excluded by contract. A manager's spreadsheet allocation is not proof that the lease authorizes the charge.

Keep commercial lease reimbursements distinct from residential utility billing arrangements. Submetering, ratio allocation, and service charges can raise jurisdiction-specific requirements. Have the responsible adviser establish the permitted method. The financing analyst should use the resulting lawful contractual assumptions rather than treating a higher reimbursement percentage as freely available income.

Obtain invoices for the same period as the operating statement. Record whether the owner paid them directly or the tenant paid the supplier. A tenant-paid cost should not also appear as the owner's reimbursed expense unless the accounting arrangement actually requires that presentation.

## Reconcile billings and collections separately

Assume a fictional property incurs $180,000 of annual utility expense. Its supported tenant charges total $150,000. Opening reimbursement receivables are $20,000 and closing receivables are $35,000, with no write-offs, credits, or other adjustments. Collections are $135,000: opening receivables plus current charges minus closing receivables.

| Hypothetical reimbursement bridge | Amount |
|---|---:|
| Utility expense incurred | $180,000 |
| Tenant reimbursements billed | $150,000 |
| Opening reimbursement receivables | $20,000 |
| Closing reimbursement receivables | −$35,000 |
| Reimbursement collections | **$135,000** |
| Expense less billings | $30,000 |
| Expense less collections | **$45,000** |

The billed recovery ratio is approximately 83.33%; the collected ratio is 75%. The $15,000 difference is receivable growth under the stated assumptions. It may reflect timing or collection problems. An aging report and subsequent receipts are needed to decide which explanation applies.

Neither ratio by itself answers the next year's forecast. A newly billed annual reconciliation may be collectible later, while a disputed balance can remain unpaid. Identify each material receivable instead of assuming that all billings become cash or that every delay is permanent loss.

## Present gross and net schedules without duplication

A gross presentation includes $180,000 of utility expense and $135,000 of collected reimbursement income, leaving a $45,000 cash burden. A net cash presentation could show the $45,000 burden directly. It cannot then add the same $135,000 reimbursement as separate income; that would count recovery twice.

The same control applies when comparing a seller's operating statement with the lender worksheet. Mark whether each starting expense is gross or already net of recoveries. If the seller nets a credit against expense and the analyst adds the credit as income, the reported NOI will overstate the economics despite every supporting invoice being real.

Keep reserve transfers and refundable tenant deposits out of this reimbursement bridge. Also isolate any management fee or administrative charge collected above cost so the reader can evaluate its contract support and recurring collection history separately.

## Stress costs and lease limits together

Now assume next year's utility cost rises to $216,000. Of that amount, $40,000 is excluded from the recovery pool under the hypothetical lease allocation. Eligible costs are $176,000. Tenant occupancy shares and contractual caps permit billing only 80% of that pool, or $140,800. Assume 95% of those charges are collected during the forecast year: $133,760.

The net cash burden becomes $82,240. Compared with the historical $45,000 burden, operating cash falls $37,240 even though total utility expense rose only 20%. This scenario combines higher costs, excluded categories, limited allocation, and collection timing. Each input must have its own evidence; the 80% and 95% assumptions are not industry rules.

| Forecast step | Calculation | Amount |
|---|---|---:|
| Eligible cost pool | $216,000 − $40,000 | $176,000 |
| Permitted modeled billings | $176,000 × 80% | $140,800 |
| Forecast cash collections | $140,800 × 95% | $133,760 |
| Owner's cash burden | $216,000 − $133,760 | **$82,240** |

If the lender uses accrued reimbursement income instead of this cash convention, retain the collection bridge and show the lender's treatment separately. Do not silently switch methods between the historical and forecast columns.

## Make the recovery assumption auditable

Deliver a schedule that ties each cost category to an invoice, a contract provision, an allocation, a tenant charge, and collection evidence. Record disputes and expected settlement dates. Reconcile any year-end true-up to the period it covers rather than annualizing a single large reconciliation receipt.

The underwriting decision is whether reimbursements provide a supported offset to operating costs, and when that offset becomes available. A property can have strong contractual recovery rights and still need cash to bridge supplier payments. The finished analysis should reveal both the durable net expense and the temporary working-capital demand, with no reimbursement counted twice.


## Source references
- [Phillips Edison & Company — 2025 lease income table](https://www.sec.gov/Archives/edgar/data/1476204/000147620426000005/R33.htm) — Schedule of Operating Leases and footnotes · Checked 2026-10-21 · Source date / context Year ended December 31, 2025 · Historical issuer disclosure illustrating distinct income categories; no issuer financial condition or current lender policy is inferred.