Lease Audits Reduce Operating Costs

According to the International Tenant
Representative Alliance (ITRA), whose members specialize in tenant
representation, most commercial tenants have received 2009 expense
reconciliation statements of operating expenses and taxes from their
landlords. Typically, tenants have 30-60 days after receiving these
statements to give notice to the landlord if they wish to perform an
audit. If a company is leasing office
space, industrial space, warehouse or other commercial real estate,
now is the time to determine if the landlord is over-charging for
expenses by performing a lease audit.

For many commercial real estate tenants, rent is the second
largest operating expense after personnel costs. Auditing the landlord’s
expenses provides confidence that these costs are being properly
billed. Not all tenants need to audit lease expenses annually, but here
are a few examples of situations that could trigger an audit::

1.    If a gross-lease was executed in 2009, the
tenant will have only one opportunity to audit the base year (2009)
expenses. If a tenant waives this right, they may be overbilled for all
ensuing years due to a landlord understating the base year expenses.
Even a tenant with a net-lease signed in 2009, while these don’t
typically have a base year dollar amount, should consider an audit to
verify they are only being charged for permitted expenses.

2.    Landlords of mixed-use properties routinely
overcharge tenants for operating expenses and real estate taxes, because
the landlord allocates expenses to the various components of the
complex using methods which don’t reflect the actual usage of services
by each component. Substantial operating expense increases often signals
that a landlord has improperly calculated the expenses. A tenant should
look at specific line items of expense when reviewing the year-to-year

3.    Buildings in which landlords have expended
major capital on building systems, exteriors or common areas certainly
should be considered as an audit target. The lease should dictate if
such capital expenditures are permissible.

4.    The gross-up of expenses is addressed in
most leases and if applied properly is fair to both the tenant and the
landlord. When a building has high vacancy, a landlord can make
significant errors when applying this gross-up adjustment which
negatively impacts a tenant’s share of the annual operating expenses,
resulting in the tenant paying too much.

Paul Stevens, ITRA’s lease audit specialist
stated, “tenants should protect themselves by hiring a professional
lease auditor to review their lease and operating expenses to determine
if they are being fairly charged. Many tenants have found, by being
proactive, they have been able to save thousands of dollars over the
term of their lease.”


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