Commercial Office Lease Auditing
As a Tenant, have you ever wondered whether your Landlord:
... has recognized all operating expense exclusions outlined in your lease?
... passed through to you the full benefit of any property tax refunds or abatements he received?
... has respected all caps on operating expenses, or correctly adjusted operating expense charges to reflect reductions in leased square footage or mid-year expansions?
... charged you in error for capital costs?
Did you know that Landlords often overcharge Tenants on pass-through building operating expenses? Guidance Corporate Realty Advisors' Lease Auditing group has saved clients millions of dollars in excess operating expense costs!
Capital Costs Errors: Most leases require that capital expenditures be amortized over the useful life of the new equipment installed in a Landlord's building (e.g. HVAC, parking lot, etc.). Other leases may only allow that capital expenditures be amortized and charged to Tenants to the extent that they reduce the operating costs of the building. However, in many cases, Landlords may expense rather than capitalize expensive one-time investments. This practice will inflate a Tenant's annual operating expense costs.
Base Year Errors: The operating expense Base Year amount is the reference point that the Landlord will utilize in each subsequent year to calculate your annual operating expense "pass through" costs. If a Landlord inadvertently, or intentionally, sets the Base Year costs for a Tenant too low (not in compliance with the lease document and/or Generally Accepted Accounting Principals), then a Tenant's annual pass-through costs will be too high. Consider that a $0.25/Rentable Square Feet ("RSF") error in the operating expense Base Year calculation would cost a 25,000 RSF Tenant $6,250 in additional rent in just the second year of its lease, and $31,250 in overcharges over a five-year lease term. The numbers just increase as the RSF, lease term or Base Year error amounts increase.
A Tenant may wish to consider a Lease Audit of the Landlord's Base Year costs, as well as Lease Audits of subsequent years' operating expense costs.
Other Issues: There are a wide variety of other errors that can occur in a Tenant’s operating expense billings that can cost Tenant money. A relatively simple error could be a mistake made by a Landlord in applying any defined “caps” regarding a Tenant’s operating expense billings. Other issues can be more complex, such as confirming that a Landlord has credited back to the building’s operating expense accounts overtime HVAC charges made to other Tenants and collected by the Landlord as additional revenue. Has the Landlord respected all operating expense exclusions identified in a Tenant’s lease? Has the Landlord charged the operating expense accounts for inappropriate expenses, such as tenant improvement costs or costs related to soliciting new tenants for the building? Have upgrades to the building been charged to operating expenses versus normal maintenance and repair costs? Have any changes in the Tenant’s rentable square footage (increases or decreases) been accurately billed as regards operating expenses? Most of these issues cannot be identified without reviewing a Landlord’s general ledger records, associated worksheets and specific back-up documentation.
The Process: During a Lease Audit, Guidance auditors will dig into the lease and accounting details to confirm that the Landlord's charges are accurate and in compliance with your lease documents. Lease Auditing is a complicated business; it is sometimes referred to as "forensic accounting." We are often looking at subtle details and issues that may be several years old. In some cases, buildings have been sold since the lease was negotiated and leasing agents and property managers may have changed.
To be successful, the Lease Auditor needs a clear understanding of these issues, and the accounting and billing strategies utilized by Landlords.
Few commercial brokers have personal experience with Lease Auditing!
When negotiating a client's new lease, Guidance brokers utilize their detailed knowledge of the Lease Auditing process to protect clients from unreasonable charges by negotiating favorable operating expense lease language, which typically includes extensive Operating Expense Exclusions.