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Denver, Colorado Office Space
Have you ever wondered about the accuracy of your monthly lease billing?
Many companies have decided that it's a good business practice to audit their Landlord's lease billings. Overcharges in Landlord's billings to Tenants are actually quite common. While these errors can occur in the billing of the base rents, they most often appear in the operating expense component of the lease billing. Errors can be attributed to:
- overworked property management staff making mistakes in coding and even simple math errors.
- problems inherent with administering multi-tenant office buildings utilizing a wide variety of lease rates, base years, operating expense exclusions and tenant specific lease provisions.
- Landlords who aggressively "push the envelope" by trying expense items that should have been capitalized or including costs specifically excluded by a Tenant's lease document.
The Lease Auditor's Task
The Landlord's annual operating expense reconciliation statements typically provide Tenants with only abbreviated information. However, a qualified lease auditor, will scour the Landlord's records, reviewing the general ledger, copies of receipts and payment vouchers, and internal allocation worksheets providing details on capital expenditures, after-hour utility cost charges, tenant specific charges, etc. Lease auditing has been called "forensic accounting" because of the level of investigative detail involved.
Why Audit?
A lease audit will confirm that expense caps are being respected and that the Landlord has complied with all of the operating expense exclusions contained in the Tenant's lease. The lease auditor will confirm that capital expense items are not being improperly expensed, that any property tax credits received by the Landlord are being credited back to the Tenant, and that inappropriate charges such as leasing commissions and tenant finish expenditures are not being charged back to the building's Tenants. Comparing the details of the Landlord's accounting records with the Tenant's lease document can identify a wide range of problems.
Lease Audit Success Stories
Here are just a few examples of errors discovered during actual lease audits. (To maintain our clients' confidentiality we cannot disclose the names of the Tenants or Landlords involved.)
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A 10,000 SF retail Tenant signed a 5-year NNN lease and then renewed its lease for another 5 years while downsizing to 5,000 square feet. The Landlord's property manager correctly adjusted the base rent billing for the lower SF but "forgot" to reduce the Tenant's pro-rata billing for operating expenses and continued to bill the operating expenses at the original, higher pro-rata share.
A lease audit four years into the renewal term caught this error, resulting in an $80,000 credit issued to the Tenant.
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A 40,000 SF office space Tenant signed a 10-year full service gross lease with a base year for operating expenses. The Tenant's lease contained a 5% cap on the annual increases to all operating expenses. The Landlord "forgot" to apply the cap.
A lease audit caught this error in the 3rd year of the Tenant's lease with savings produced over the Lease term in excess of $250,000.
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A 50,000 SF office space Tenant signed a 10-year full service gross lease with a base year for operating expenses. The Landlord's operating expense billings to the Tenant contained charges for an off-site parking garage. These charges were buried within the various operating expense cost categories.
A lease audit during the 4th year of the Lease discovered that the Tenant's lease contained building and premises definitions that allowed the auditor to contest all of the operating expense charges related to the off-site parking garage. The Tenant received a credit recovery for the past year's charges and reduced its exposure to operating expense charges in future years. The total savings over the lease term exceeded $275,000.
Knowing your Rights
Each lease and situation is unique and not every lease audit results in a refund for the Tenant. An experienced lease auditor can review a Tenant's lease document and provide feedback regarding the Tenant's rights to audit and any areas of particular concern.
Audit Lessons
Negotiating a lease document that contains strong audit rights as well as detailed, broad operating expense exclusion language provides the best "insurance" in this area.
Fees
Lease audits are sometimes performed on a full contingency fee basis meaning that the auditor is not compensated unless an actual recovery is made for the Tenant. Lease Audits can also be performed on an hourly fee basis or a combination of contingency and hourly fees
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