Client
A major national bank in New York City.

Audit Discovery
Client has a long-term lease in a midtown Manhattan office building. In lieu of paying a share of the building’s operating expenses, the lease calls for increases in the fixed rent based on increases in the Porters’ Wage rate, which is the labor rate of unionized building porters in NYC, and which serves as a substitute indicator of inflation. The Porters’ Wage rate in this lease includes the monetary value of employee benefits.  The rent is scheduled to increase each year based on the percentage change in the wage rate and benefits over what they were when the lease started (the “Base Year”.)

KBA’s review revealed that midway through the lease term the landlord changed the way it calculated several of the benefits. For example, it utilized different factors and made different assumptions as to seniority when calculating the value of vacations and sick days. The inconsistency with the way the Base Year wage rate had been calculated resulted in an overstatement of the percentage increase in the wage rate. This directly caused the rent increases to be artificially inflated, resulting in significant unanticipated costs in both the current and future years.

Resolution
After much analysis, research and negotiation, the landlord agreed to revise its methods and calculate all years’ wage rates and benefits consistently, using the same components and same assumptions, so as to isolate the true increases in wage rates as anticipated by the lease. This will save the bank $1.4 million over the life of the lease.