Client

Insurance company with a 20,000 SF lease in a suburban office building.

Audit Discovery

The tenant had leased 50% of a 40,000 SF building under a modified gross lease with a base year. For the first few years, building costs were stable, however in the fourth year, expenses increased by 36% and the tenant’s share of the increase was reduced to 33.3%. Despite the decrease in share, the tenant’s bill increased by more than $38,000.

After investigation, KBA learned that the building had changed size. In the fourth year the landlord added a 20,000 SF wing to the building, increasing it to 60,000 SF. The landlord’s CPA firm properly reduced the tenant’s building share from 50% to 33.3% (now 20,000 SF of 60,000 SF). It made no further adjustments.

KBA asserted that in a Base Year lease, it is improper to compare expenses for a 60,000 SF building to those of a 40,000 SF building. Either the Base Year’s expenses must be changed to reflect the larger building, or the current year’s expenses must be adjusted to what they would be for the smaller building. Failure to do so will result in overcharges.

Resolution

KBA persuaded the landlord to change its billing method to a cost-per-square-foot method rather than a share-of-the-building method. Base Year costs were divided by 40,000 SF to arrive at a cost per square foot, and each escalation year’s costs were similarly divided by the building size to arrive at such year’s cost per square foot. The tenant was billed for the per square foot increase over the Base Year, multiplied by its footage. The result was that from the fourth year onward, the costs reflected only the normal inflationary increases. This enabled us to resolve our differences, recover the overcharges and significantly reduce the tenant’s liability for the remaining 5 years of its lease term.