reimbursable expenses in argus valuation dcf

As a landlord, reimbursable expenses are a great thing.  Reimbursable expenses are exactly what they sound like, property expenses that can be recovered by the landlord – essentially, the tenant pays the costs of operating the property.  Reimbursable expenses are found in net leases.  Single net leases, real estate taxes are reimbursed.  Double net leases, taxes and insurance are reimbursed and triple net leases include: taxes, insurance and maintenance costs.

The example below represents a property with triple net (NNN) leases:

Real Estate Taxes – The detail reference in the amount refers to specifics of when real estate taxes are paid.  In this example, real estate taxes to be paid in $50,000 increments twice a year.  Since the taxes do not change based on property occupancy levels, they are listed as 100% fixed.

CAM – Interior - Common Area Maintenance costs for the interior of the property are $2 per square foot per year.  But, these costs are only 15% fixed.  If there are no tenants occupying the property, their wear and tear of the property isn’t as significant.  As an example, let’s suppose this 50,000 square foot office property is 80% occupied.  What is the total CAM – interior reimbursable expense?

50,000 SF * $2/PSF = $100,000 per year
$100,000 * 15% = $15,000 in fixed costs for interior CAM per year
$100,000 * 85% (variable costs) * 80% (occupancy level) = $68,000
$15,000 (fixed costs) + $68,000 (variable costs) = $83,000 in CAM – interior costs

Total CAM-interior reimbursable expense: $83,000 in year 1.

CAM – Exterior - Common Area Maintenance for the exterior of the property is different from the interior.  In this situation, these costs are 100% fixed.  Therefore, the total CAM – exterior costs in year 1 are $75,000.

Insurance - Finally, insurance is also 100% fixed at $15,000 for year 1.  Each reimbursable expense will be adjusted based on the inflation settings within Argus.

The above examples may come across as a bit elementary or overly simplified.  In the real world, reimbursable expenses are detailed out to include janitorial, elevators, general maintenance, landscaping, security and other similar line items. In this example, everything is captured under the two Common Area Maintenance line items.

Likewise, the example is limited to costs on a dollar per area or dollar amount per year basis.  Other options available under the Units column include % of EGR (Effective Gross Income), % of Constant (a constant dollar amount) or % of Line (referencing a specific line item entry available in Argus – there are numerous line items to choose from).

Finally, keep in mind that expenses that are non-reimbursable or capital expenditures are captured in separate sections.