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Landlord OPEX Reconciliation Season Is Here: Get Prepared

Did you know?

Landlord billing errors do exist
But with the right expert on your lease audit team, you can identify and recover those errors—potentially saving you millions.

Millions of dollars in recoveries can be achieved

With an expert conducting a thorough examination of pass-through and other occupancy-related expenses, you’re not leaving valuable savings on the table.

Time is of the essence

You may have a limited amount of time to notify your landlord of your intent to exercise your lease audit rights.

Conducting a lease audit is cost effective

Typically lease audits result in no direct out-of-pocket costs – as a small portion of your overall savings can be used to cover the costs.

Lease auditing is a real estate function, not an accounting issue

You need the knowledge and experience necessary to uncover and successfully recover variances from real estate standards.

The Top 5 Commonly Missed Errors

1. Tenant Reimbursements

If your lease is in a multi-tenant building, you could be paying for above standard services directly. These are costs that the landlord incurs to provide services like utilities, after-hour heating, repairs, etc. that should never be included in operating expenses. Without a detailed review of the landlord’s general ledger, it’s unlikely you’ll uncover these overcharges.

2. Gross Up Errors

It is a common practice for office leases to contain a provision allowing the landlord to bill operating expenses based on building occupancy of 95% or 100%. This adjustment, or “gross up,” is a complex calculation that frequently contains errors. Without a detailed review of the landlord’s gross up inputs and calculations, it’s unlikely you’ll uncover these errors.

3. Capital Expenditures

Your lease may prohibit your landlord from passing through the costs associated with large repairs and replacement projects – or may require the landlord to spread those costs over a number of years. Although a desktop audit may catch this error in the first year it occurs by comparing year over year expenses, without a detailed review of the landlord’s general ledger, you are not likely to find incorrect capital expenses that are amortized equally in both of the comparison years, or are incurred at a relatively stable amount each year.

4. Parking Garage & Other Non-Office Areas

Your lease may contain language excluding the costs associated with specialty areas of the building such as parking garages, retail areas, fitness centers, and cafeterias. Since these costs are often combined with the expenses associated with the office portion of the building, it is extremely easy for the landlord to erroneously include them in operating expenses – and very difficult for you to identify them in a desktop audit.

5. Ownership Expenses

Your lease should contain a provision which requires that the operating expenses passed through must be directly related to the operation and maintenance of the building. Landlords often account for their expenditures on a building by building basis and fail to separate those costs that should not be borne by the tenants – such as those associated with the preparation of space for tenancy, entertainment and tenant relations costs, and ownership legal fees and tax preparation fees. Without a detailed review of the landlord’s general ledger, it’s unlikely you’ll uncover these overcharges.

When choosing a lease auditor with real estate expertise, consider the following:

Will they damage your relationship with the landlord in the pursuit of all potential recoveries – even those that are insignificant and inflammatory? Does their reputation in the industry drive credibility with landlords and provide an advantage in negotiations?

Scot Ginsburg is a senior vice president of Hughes Marino, an award-winning commercial real estate company specializing in tenant representation and building purchases with offices across the nation. Contact Scot at 1-844-662-6635 or scot.ginsburg@hughesmarino.com to learn more.

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