Lease Auditing Services

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.

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.

There are a wide variety of other errors that can occur in a Tenant’s operating expense billings that can cost Tenants 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.

During a Lease Audit, Guidance Corporate Realty Advisors 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.