Lease Audit

Understanding Lease Audits and who would benefit from them

What is a Lease Audit?

Lease audits (also commonly referred to as Lease Reviews, Operating Expense Reviews, CAM audits, and Escalation Expense Reviews) are detailed reviews for a Tenant of a Landlord’s periodic expense billings to determine whether the tenant is being charged properly for its share of building oper­ating expenses. 

Why are Lease Audits needed?

Real Estate leases, by their nature, are complicated contracts. Typically, Landlords establish “standard lease” agreements for their properties. Later, through negotiations, they agree to modify these standards to attract and retain desirable tenants. When it comes time to prepare annual expense billings to those tenants, Landlords often inconsistently apply the specific language for each individual lease to the actual billings. These billing errors can result in tenants paying more than was agreed to. To mitigate potential excess costs, many tenants opt for Lease Audits.

Goals of a Lease Audit - 

The ultimate goal is to verify that the lease language is accurately and fairly interpreted and applied when preparing the landlord’s billings so that the Tenant is not overcharged. Secondarily, an audit can identify weaknesses in the lease language that may contribute to unfair or conflicting interpretations so that these can be corrected, or, at a mini­mum, taken into consideration at lease renewal.

Who would benefit from a Lease Audit?

Generally, any Tenant that pays its prorata share of taxes, insurance, CAM and / or operating expenses is a candidate, particularly when the following occur:

  • Large premises (> 25,000 SF)
  • Properties with a recent change in ownership or management (varying interpretations and calculations)
  • Properties undergoing significant renovations (capital vs. operating expense classifications)
  • Newly constructed properties  (to establish an accurate base year)
  • Mixed use properties including multiple elements (complex allocation issues)

What contributes to a successful Lease Audit?

Several factors influence the outcome of a Lease Audit:

Strength of the lease language – Leases should provide a clear description of expenses to be included or excluded, the building area and how a Tenant’s share will be determined. Management and administrative fee should be defined, along with the basis for the calculations and the methodology for allocations among properties or tenant groups.  Leases that are vague provide Tenants with little leverage for dealing with Landlords.

Timing of the Audit – Audits should be performed as soon as possible after the Landlord billing statements are issued. Deadlines specified in the lease should be monitored and adhered to for the best results. While Landlords will often address inquiries after deadlines expire, they are generally less responsive and forthcoming with information the later a review commences.

Approach -  A professional audit approach is critical whether performed by internal staff or a third party Lease Audit firm.  Most Landlords will quickly correct clerical errors and obvious misinterpretations of the lease. More complicated issues may require negotiation, but those negotiations should never become adversarial. The auditor should always manage the audit to maintain a positive Tenant/Landlord relationship.  Keep in mind that Landlords are more likely to work with Tenants they view to be long-term business partners, rather than short– term opportunists. Choose your auditor carefully.

Conclusion –

Conducting Lease Audits as part of a Tenant’s ongoing commitment to strategically manage its portfolio can be a good investment of resources. Benefits include cost containment, opportunities to identify and correct lease language errors and ambiguities, and communicating to Landlords that you are serious about maximizing the value of your tenancy. Get the most out of your Lease Audit efforts by planning adequately (screening leases for audit feasibility and proper timing of the audit function), choosing the right auditor (internal or external), and analyzing and communicating the audit findings to all appropriate internal parties so that future documents and procedures can be improved.

Galaxy Partners is a national corporate real estate firm headquartered in Atlanta, Georgia.  Galaxy provides Consulting, Transaction, and Management services exclusively to corporate clients throughout the USA.

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