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Lease Audits for Fun and Profit

Cover Story Excerpt from Corporate Real Estate Strategies | Issue 34

Believe it or not, corporate tenants often spend more time and money matching up purchase orders and paying for bottled water than they spend making sure that their rent expense (most likely the second highest company expense after personnel) is correct.

A lease audit is an invaluable tool that identifies billing errors that are, unfortunately, all too common in commercial real estate leases. The following is a prime example of how a recent audit that our firm conducted saved the tenant significant sums of money:

A tenant leased 200,000 square feet of space in a 1,200,000 square foot office building. The office building was part of a 3,000,000 square foot mixed use complex that included retail stores, a hotel, a supermarket, and a parking garage. The tenant had recently seen a large increase in operating expenses and real estate taxes. Being concerned about the accuracy of these expenses, the tenant engaged our firm to verify the landlord’s records.

Audit Findings

The audit revealed that the landlord had made several errors.

First, real estate taxes, which should have been charged to the parking garage, were charged to the office building. The reason? If real estate taxes are charged to the parking garage, the landlord would not be reimbursed, whereas when they are charged to the office building, the tenants in the building reimburse the landlord.

Second, the property was managed by an affiliate of the landlord. The lease stated that if a management fee was paid to an affiliate of the landlord it could not exceed the amount that would be paid to a third-party property manager. In spite of this limitation, the landlord/manager charged a management fee, approximately twice the market rate being paid to third-party managers.

Third, the lease stated that no expenses for personnel above the level of property manager would be charged to the office building. The landlord had hired an on-site general manager to oversee the operations of this mixed use complex in addition to managing additional properties owned by the landlord in another city. The compensation paid to the general manager was well beyond the amount that would be paid to a property manager for this specific complex.  (Read More)

Download our Fall 2013 Newsletter to Learn How a Lease Audit Saved This Tenant $801,000 along with Featured Stories, Market Reports, Frequently Asked Questions and More