Since the early 90’s, Jason Hughes has made a name for himself representing thousands of San Diego tenants in their lease negotiations. During many of those transactions, Ed Muna was on the opposite side of the table representing the landlord’s best interests. While they were adversaries at the negotiating table, mutual respect and friendship eventually brought the two together in 2011.

When Hughes and David Marino formed Hughes Marino in 2011, they were determined to create value for their clients that was not traditionally provided within the industry. As an outside observer of the new organization, Muna knew an opportunity existed for the industry to better look out for tenants during their lease terms.

“What I observed were well negotiated leases ending up in the file cabinet and tenants receiving cookie cutter service and operating expense charges that were often in conflict with the lease. This was completely unintentional, but the reality is that a building with 50-plus tenants, or an ownership group with 1,000+ tenants, will have a tough time getting each property manager and accountant on board with the various provisions of each lease,” Muna said. It was this observation that got Muna and Hughes brainstorming on ways to protect the firm’s clients and create a service dedicated to ensuring landlords comply with industry standards and honor negotiated lease terms.

Now entering its third year, Hughes Marino’s lease audit service is seeing results that exceeded their expectations. Last year the firm identified over $2 million in erroneous charges to clients, and 2013 is on pace to surpass that figure.
Muna indicated that while he knew mistakes were being made, they are far more prevalent than even he expected. “The fact is, property management and accounting is a human function, and the existence of mistakes should not come as a surprise. When I was on the ownership side, it took multiple reviews to ensure the most accurate accounting was prepared, but even then you cannot guarantee 100% accuracy.”

What has been a pleasant surprise for the firm is how cooperative most landlords are during the lease review. “Most of the errors we identify are pretty black and white and clearly unintentional. A reputable landlord is more concerned about the long term relationship with their tenant than defending a mistake,” stated Hughes.

Muna indicated that there has been the occasional instance where the landlord gets defensive. “While 9 out of 10 errors are quickly addressed and corrected by the landlord, we have had a few landlords dispute what seems to be a very black and white error. Unfortunately, most of those cases involve property management personnel that really do not understand the lease provisions well enough to resolve them.”

While lease audits are not new to the commercial real estate industry, the service is not commonplace in San Diego. According to Muna, most lease audit firms are focused on the big fish in cities like New York or Los Angeles where errors can result in seven-figure recoveries and fees. “For Hughes Marino, this is about making sure our clients are being treated fairly and per the terms of the lease. While we have had several six-figure recoveries, including one that exceeded $500,000, most of the errors we have helped tenants reverse are in the five-figure range.”

Hughes also pointed out that the firm’s tenant representation only platform allows them to provide the service without a conflict of interest. “While the full-service firms that represent both landlords and tenants may claim the ability to provide a lease audit service, the reality is they will not compromise a landlord relationship for that of a single tenant. Most full service firms generate 80% or more of their revenue from landlord activity, so the conflict is obvious,” Hughes adds.
As far as the best time to have an audit conducted, Muna indicated that operating expense charges should be reviewed carefully every year. He pointed out that if a tenant waits too long to question an expense, a mistake can have a compounding effect. It also becomes more difficult to confirm the error and secure a refund with the passage of time. “Landlords typically send out the tenant’s share of budgeted operating expenses between February and June of each year. Tenants should not delay in reviewing these charges for red flags,” says Muna.

Hughes Marino Lease Audit Services works on a performance basis and is only compensated a small percentage of the refund or current year savings secured on the client’s behalf, essentially eliminating all risk. For more information about a lease audit review, contact Ed Muna for a complimentary review.