By Michael Cavell
This is the time of year when you can expect to receive your landlord’s operating expense reconciliations for the prior year. You have likely noticed in previous years that these reconciliation statements are often lacking in detail or they are sometimes presented in a way that doesn’t give you the information you need to understand the “where” and “why” regarding the prior year’s property operating expenses.
I expect that the reason these statements are lacking in detail is that the landlord would rather you not dig into their books and ask a bunch of questions. But while most landlords are highly skilled and run professional operations, the fact remains that errors are regularly occurring, because even landlords and their property managers sometimes have difficulty interpreting proper expense treatments or tracking and following myriad individually negotiated lease terms and conditions.
Life would be much simpler for your landlord if you would just accept the statement as-is and pay what they say you owe. However, in almost all leases you are provided an opportunity to analyze the charges every year. You bargained for the inclusions and exclusions in the lease, and if not properly examined, how will you know whether the terms have been followed?
Luckily, you don’t have to go it alone (or feel overwhelmed) while reviewing your operating expense reconciliations. By utilizing a team with the right experience and technology, your business can leverage a trusted third-party partner to ensure any errors are caught, and that you are only paying for what was agreed to!
Here are a few key details our team reviews for our clients, and items all companies should look out for. At a minimum, you should:
- Confirm that you have received a reconciliation and that you are not missing prior years
- Receive in a timely manner a reconciliation that contains a reasonable breakdown of all expenses
- Verify all calculations and all payments made are accurate
- Confirm that the correct pro rata share is being used and supported
- Ask the landlord to explain any unexplained major increases over the last few years
- Ask the landlord to explain any excessive management and administrative fees or expenses
- Confirm any/all Lease caps are being applied and to the correct expenses
- Identify any new categories of expenses that were not in prior years reconciliations
- Keep track of any time limitations where you must dispute or assert your right to audit
All these key measures require an understanding of what the lease says can be included and what should be excluded. When analyzing your lease, we encourage you to ask yourself key questions such as:
- How was my pro rata share calculated?
- Does a major increase this year mean it was high or was it the result of lower operating expenses in the prior year?
- What management and administrative fees are allowed, and more importantly, what does the lease state they are for?
- Do I have a cap and how is that supposed to be calculated; year-over-year, cumulative, compounded, both, is it tied to CPI?
- Does a new expense line mean it is new or was it in a different line-item previously?
- Do I have a time limitation on how long I can dispute what the landlord indicates is owed before possibly losing my right to challenge it?
A lease can be very long and tedious, and there is plenty of legal lease language to understand and to consider, so if this sounds overwhelming, you are not alone. Our team at Hughes Marino reviews hundreds of annual reconciliations each year and has identified millions of dollars in erroneous charges for our clients. Our Lease Administration and Lease Audit team is here to help ensure compliance with your lease before it is too late.
Michael Cavell is senior vice president of lease administration & audit at Hughes Marino, an award-winning commercial real estate firm with offices across the nation. Michael is a part of Hughes Marino’s Portfolio Lease Administration & Advisory team and helps tenants address issues that arise during occupancy. Contact Michael at 1-844-662-6635 or email@example.com.