previously. Accepting a rudimentary reconciliation—even one broken down to
expenses per billing category—is to trust
your company’s finances to an outside
party with a vested interest in maximizing
If you are walking into
your building and notice
construction, audit your landlord.
Renovations and capital projects may be
subject to your lease operating expenses
exclusions, and every project should be
audited for permissibility under your lease.
And although you are most likely obligated to reimburse the landlord for a true
building operating cost, you probably are
not obligated to reimburse for increasing
the value of his/her building if it does
not reduce building operating costs in the
And if your building had undergone
renovations and/or capital improvements
in past and unaudited years, it may not
be too late. Those costs were most likely
amortized across future years, and there
may still be an opportunity to avoid ongoing expenses if they prove to be impermissible per your lease exclusions.
The Potential Benefits of a Lease Audit
The following are a few examples of lease-audit results.
Global Financial Firm, San Francisco, Calif.
Space Occupied: 95,000 SF
Audit Findings: The tenant occupied space in a building that had recently been sold.
Proposition 13 immediately revalued the real estate tax levied on the building. The
landlord did not properly account for the tax increase in a revised base year as the lease
Audit Result: The landlord agreed with the audit findings, refunded the $350,000
in past overcharges, and corrected the base year, creating $550,000 in additional cost
avoidance across the remaining lease term.
National Legal Firm, New York City
Space Occupied: 128,000 SF
Audit Findings: The landlord was expensing security services at above-market rates,
inflating management fees passed through to the tenant, billing salaries of above
building manager-level personnel, double-charging for above-standard building services
paid for by individual tenants, and passing through lease-impermissible capital project
Audit Results: The landlord was unable to refute any of the audit findings and refunded $1.2 million to the tenant. The amortized costs of the impermissible capital projects
were stricken from future invoicing, creating $400,000 in future cost avoidance.
Publishing Company, Phoenix, Ariz.
Space Occupied: 20,000 SF
Audit Findings: The tenant was in a building with substantial vacancy. The landlord
gross-up methodology was not accounting for fixed versus variable occupancy level-driven expenses. In addition, the building did not have a modern Energy Management
System (EMS), causing the building to overcool vacant portions of the building, further
skewing the utility costs in the gross-up calculations.
Audit Results: The landlord agreed that the gross-up methodology employed was
faulty, and refunded a settled amount of $85,000 to the tenant. An accurate gross-up
methodology was agreed upon for future use.
Your Lease is
Perhaps the most valuable
times to have a lease audit
performed are at the
commencement and expiration of your
lease. If you occupy under a base year
lease, the valuation of your base year will
have material impact on your leasehold
expenses throughout the term of the lease.
Likewise, lease audits should always be
performed as a standard practice at any
lease expiration. Not only might you lose
rights to recoup any overcharges after
vacating the premises (audit windows), but
you also may lose significant leverage after
your move. Lease audits may also provide
leverage and have a material impact on
any lease renewal negotiations and con-
struction of lease amendment/renewal
Landlord Are in
Though it might not
always be obvious, it is in a
tenant’s best interests to
periodically inquire into a building and
its owner’s financial well-being. These are
difficult financial times, and few sectors
have been hit as hard as commercial real
estate. For example, our firm has uncovered
multiple examples of landlords in difficult
financial straits materially overcharging their
tenants. Although we would never suggest
that such a situation directly underlies
the overcharge in any specific example,
the coinciding of the two—a landlord
in financial distress and overcharges to its
tenants—can be a recurring theme.
It is important to remember that unless
you signed it away, auditing your landlord-issued expenses is your right. It is sound
fiscal practice and required compliance
protocol in many of the most efficiently
run companies in the North American
markets. Lease audit has become an
embraced best practice—landlords expect
to be lease audited and have generally
already prepared for your call.