Why can’t my internal accounting team perform my lease audit?
Because lease auditing is a real estate function, not an accounting issue. You need the knowledge and experience necessary to uncover and successfully recover variances from real estate industry standards. Internal accounting teams rarely have this necessary experience and may miss out on valuable savings.
My company has performed a desktop audit—isn’t that enough?
A desktop audit is a limited view. It only shows you a review of the mathematical calculations, high-level lease compliance and the landlord’s explanations for large year over year variances. A lease audit, on the other hand, goes into greater depth. It includes a detailed review of the landlord’s books and records, down to individual contracts, invoices and payroll records. Because the review is more extensive, we uncover additional errors and maximize your recovery. Unfortunately, a desktop audit alone won’t tell the whole picture and will still leave money with the landlord that should be coming back to you.
Will my relationship with my landlord be adversely affected by this audit?
Absolutely not—experienced professionals who are able to quickly identify erroneous billings without damaging your company’s relationship with the landlord are available. Well documented claims are a key starting point in a lease claim and a good claim stands on its own and is either valid or not. Your money doesn’t expire. A good lease audit firm will also give you the option of not pursuing a particular claim.
What’s a base year audit? And why is it important?
A base year audit is typically conducted two years after your first year of a lease. It is your first and only opportunity to review the billings and make any necessary adjustments. It’s an important opportunity to capture billing errors and make lease adjustments to drive future savings.
How much extra will a lease audit cost me?
Lease audits result in no direct out-of-pocket costs to initiate and execute the process of recovery. Typically, a small portion of your overall recovery is the only compensation, used to cover the costs on a negotiated contingency basis. A model based on results generated and approved by you on your behalf, which creates no risk or upfront exposure from a capital expense perspective, is optimal.
The top five commonly missed errors
1. Ownership Expenses
Your lease should contain a provision which requires that the operating expenses passed through must be directly related to the operation and maintenance of the building. Landlords often account for their expenditures on a building by building basis and fail to separate those costs that should not be borne by the tenants—such as those associated with the preparation of space for tenancy, entertainment and tenant relations costs and ownership legal fees and tax preparation fees. Without a detailed review of the landlord’s general ledger, it’s unlikely you’ll uncover these overcharges.
2. Capital Expenditures
Your lease may prohibit your landlord from passing through the costs associated with large repairs and replacement projects—or may require the landlord to spread those costs over a number of years. Although a desktop audit may catch this error in the first year it occurs by comparing year over year expenses, without a detailed review of the landlord’s general ledger, you are not likely to find incorrect capital expenses that are amortized equally in both of the comparison years, or are incurred at a relatively stable amount each year.
3. Tenant Reimbursements
If your lease is in a multi-tenant building, you could be paying for above standard services directly. These are costs that the landlord incurs to provide services like utilities, after-hour heating, repairs, etc. that should never be included in operating expenses. Without a detailed review of the landlord’s general ledger, it’s unlikely you’ll uncover these overcharges.
4. Gross Up Errors
It is a common practice for office leases to contain a provision allowing the landlord to bill operating expenses based on expenses for a 100% or 95% occupied building. This adjustment, or “gross up,” is a complex calculation that frequently contains errors. Without a detailed review of the landlord’s gross up inputs and calculations, it’s unlikely you’ll uncover these errors.
5. Parking Garage and Other Non-Office Areas
Your lease may contain language excluding the costs associated with specialty areas of the building such as parking garages, retail areas, fitness centers, and cafeterias. Since these costs are often combined with the expenses associated with the office portion of the building, it is extremely easy for the landlord to erroneously include them in operating expenses—and very difficult for you to identify them in a desktop audit.
What can I do to protect my rights?
Most office building leases contain an audit/challenge window, which states that unless the tenant objects to the amounts on the Reconciliation within a specified period, usually 30 to 120 days subsequent to the receipt of the Reconciliation, the numbers are permanently binding on both the tenant and landlord. We provide you with a Challenge Letter to be sent to the landlord, via certified mail, upon receipt of the Reconciliation. This letter will preserve your audit/challenge rights for the number of years provided by your states Statute Of Limitations.
When should I start the audit process?
Reconciliations covering the prior year Operating Expenses are received by tenants starting in mid-February. The best time to start the audit review of your current agreements is in January. This enables the auditors to review your leases, analyze prior year Operating Expenses, compare your Operating Expenses to our proprietary Industry Data Base and prepare Challenge Letters so they can be sent immediately upon receipt of the reconciliation. The actual challenge letter is a very simple document that protects the window of opportunity to audit from closing. It is a heads up to the landlord of your desire to review the charges thoroughly prior to paying the statement.
Will I benefit from the go forward savings benefits discovered in the audit?
Yes, a good, thorough audit will plug holes and stop some current landlord billing practices in which case all the go-forward benefits belong solely to your firm for many years into the future.