Hi all,
For a fully NNN asset, should you tag inflation/recovery timing as calendar recoveries using fiscal inflation? I notice that when I do this, there is a discrepancy between expenses and reimbursement (reimb are overstated). Are there any drawbacks to just tagging as fiscal recovery using fiscal inflation? (That results in me covering all exp with reimb).
Any insight is appreciated - thanks.
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It's more so a timing nuance than an error. Typically you want to keep CY recoveries as that's almost always how recoveries are billed -- set budgets in the fall, finalize in November/December, and start your CAM billings January 1st. Other way would be to set your analysis start date as January of any year and then change the report filter to spit out cash flows on a fiscal basis. Otherwise, I would just footnote or let your manager understand the subtlety. Happy to discuss further.
That makes senses to me, thank you.
Just to confirm, if you have an analysis start date of a month other than Jan (say feb), what transpires under “cal recovery with fiscal inflation” is reimb growing each jan but expenses growing each Feb. Would you agree?
Assuming CY Recovery + FY Inflation, your reimbursement will step up (assuming inflated expenses) in January. Check your Recovery Audit report. Also, take note that your recoverable amount may not tie to property level expenses as your Argus model is more than likely calculating variable gross ups on an annual basis vs. a monthly basis (as it should be).
Check the lease and see how/when recoveries are counted. I would bet it’s an annual (calendar) timing. So from that perspective, it should be calendar. Regarding the general inflation for expenses - that’ll be firm specific modeling policies. I could make arguments for both. If it’s a true NNN, I would think there shouldn’t be a mismatch. But you mileage may vary depending on deal structure.
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