December 29, 2009
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Chris Werely
Office or facilities space is one of the biggest expenses for most small and medium businesses. Should you consider an audit of your lease? The answer is probably yes, especially if the lease is complex, with numerous variables such as tenant improvement allowances, abatements or free months, CPI increases, porter's wage increases, variable expense stops, or special provisions or other exclusions. Also, if the lease is for a longer term, such as more than three years, problems may continue or compound over time, so the sooner they are caught the more you benefit.
“The main purpose of a lease audit is to assure the tenant that he or she is being properly billed for the charges in the lease that are not base rent,” said Ira Fishman, president of ID Real Estate Partners. “The base rent is spelled out and it’s very clear on the lease. But there are escalation clauses in leases: real estate tax escalations, fuel cost escalations, and the like. Many times, these formulas are not billed correctly. For example, capital improvements are not supposed to be passed onto to the tenant; only operating costs.”
“Most tenants believe the lease is a static document and the building is a static entity,” explained Gerard Picco, senior vice president at Cresa Partners. “Our position is that the lease and tenancy are both dynamic. You do a yearly CAM (Common area maintenance and a OPEX (Operations and Expense reconciliation). Some landlords are adding contract clauses that allow tenants to hire only CPAs or fee-only auditors. But most landlords want to a good business relationship with their tenants and an audit is helping to accomplish that purpose.”
Points to remember:
- If the work is done on a contingency basis, a 70/30 split is common with 30% of the savings going to the audit firm.
- Mistakes can be found in real estate taxes, utilities, janitorial services, landscaping, repairs and maintenance, or capital improvements. They can include service contracts, such as those to keep the building clean, maintain the HVAC, or service the elevators.
For more information:
The Robert Thomas Group
ID Real Estate Partners, LLC
Cresa Partners
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Chris Werely 2 years 4 months and 29 days ago
Another good resource for tenants is KBA Lease Service's Lease Tips. It is a monthly newsletter focusing on real estate occupancy cost reduction , including lease auditing. http://www.kbalease.com/lease-tips.html