The scenario: An income producing property grosses $60,000 per year, and half is derived from a retail sales store, the other half from an upstairs nightly rental. The retail store is under a lease and the two properties cannot be sold separately. The sales shop tenant pays the utilities; the nightly rental does not.

The solution: On a conceptual approach, the properties have to be viewed as a single entity operating two businesses. As a result, three profit-and-loss (P&L) statements would be required: One for each business and a consolidated statement. The consolidated P&L is for establishing the value of the property, and the individual P&Ls are for operating the property.

To establish net operating income (NOI), all operating expenses must be deducted. As bills are paid, every item that can be classified as an operating expense gets deducted from the income collected.

As far as allocation of operating expenses, the lease with the retail sales store should define which items they pay. If the property owner feels the store should be paying more of the operating expenses, that is a matter for renegotiation of the lease, and the result would depend on the leverage available.

Whatever items the retail sales store is not obligated to pay, the marketplace will determine how much of the remaining operating expenses can be reallocated to the nightly residents. There are no set rules other than what the marketplace will bear.