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From a tenant’s perspective, neither of these is particularly
relevant. The tenant wants to know that the expenditures are
classified according to its lease, regardless of whether GAAP
or the IRS would classify things differently. For example,
a tenant’s lease may specifically exclude the cost of
all capital expenditures (items that will last for more than
one year) from operating expenses. However, both GAAP and the
IRS often permit a landlord to expense such replacement costs
if the amounts are “immaterial.” For landlords,
materiality is viewed in the context of the overall building
or building system, so everything except for major capital
projects would be considered immaterial and would be allowed.
If the statement of operating expenses provided by the landlord
was not specifically prepared for the tenant’s pass-through/escalation
billing, it is highly likely that the costs charged to the
tenant will not properly reflect those costs permitted by the
lease and could result in overbillings to the tenant. Also,
for the reasons discussed below, even when the CPA does prepare
the statements based on the specific lease terms, the tenant
should not assume all of the reported costs are correct.
The CPA Firm’s Client is the Landlord, Not the
Tenant
The financial statements prepared by the landlord’s
CPA firm are usually prepared for the landlord’s use.
The certification (if any) is made to the landlord, and although
the CPA firm has an obligation to follow the applicable account
standards, applying such standards is a question of judgment.
The tenant must remember that the CPA firm also has an obligation
to consider the interests of its client and that its client
is the landlord, not the tenant.
Operating Expense Statements Not Tailored to Your
Lease
Although many leases start out on a standard form, most are
negotiated and become unique. A building with 20 different
tenants can have 20 different rent escalation clauses.
Even though the operating expense statements may be specifically
prepared for use in billing tenant pass-throughs, they are
usually based on the building’s standard lease form and
do not take these variations into account.
Financial Statement Not Prepared by Real Estate Experts
Most CPAs are not real estate lease experts. As a result,
many of the operating expense statements that are issued by
CPA firms do not consider the nuances of real estate leasing.
These nuances frequently affect the expenses billed to the
tenant because many charges do not fit neatly into the definitions
in the lease. It takes skilled judgment to identify, understand
and treat these nuances properly.
Conclusion
Even though an operating or tax escalation bill may be accompanied
by a financial statement certified by the landlord’s
CPA firm, the tenant should understand the limitations of such
statements and should not blindly accept them as valid or accurate
for purposes of substantiating tenant charges. We have seen
countless examples of incorrect pass-throughs based on financial
statements certified as “correct” by landlords’ CPA
firms. |
