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Larger / more expensive leases: Although all leases should
be subject to routine reviews, as a rule of thumb, all leases over
30,000 square
feet should be examined automatically because even small errors
can be significant when translated to cumulative liability.
Individual expense line items that are more than 15% higher than
similar buildings in the same market should also be investigated
to determine the reasons for the variance. Leases with significant sundry
charges such as overtime HVAC, cleaning or freight elevator use
should also be examined closely for those issues.
Leases with significant or unexpectedly
high costs: Specific expenses should always be
examined when they fluctuate unexpectedly or when they have
risen faster than inflation or when they deviate from plan.
These abnormalities can be indications that the landlord is not
being consistent in its treatment of expenses or is
misinterpreting the lease. In addition, leases in which
total expenses have
risen by more than $0.45 per foot in any one year should be
automatically examined.
Leases in buildings where ownership has
changed: Changes in ownership often bring changes in
methods of accounting and management philosophies. Depending on the type of lease (gross, modified
gross, net), these changes can have unintended adverse effects
on a tenant’s charges.
Locations where landlord behavior
creates suspicion: When a landlord does not
reconcile promptly after the close of the year or where prior
audits have identified overcharges, the costs should be
looked at closely every year. In addition, landlords who do not
run their buildings well (slow on maintenance issues, loose
controls) are likely to be less diligent in billing their pass-throughs.
Leases where use of the space or
physical conditions may impact costs: These include leases
in which the tenant has not fully occupied its space or
separately contracts for some of its own services. In addition,
leases in buildings where construction or capital projects have
been taking place during the base year or any of the operating
years should always be investigated. Also, even where
construction predates the lease term, such construction may
impact taxes and other costs that generally lag the activity.
Leases with special provisions:
Leases should be looked at whenever certain circumstances are
present. For example, leases with new base years should always be
examined as soon as the first operating year’s bill is received
because these base years determine the tenant's liability for
every year of the lease term. In addition, real estate
taxes should always be examined if
the property is subject to special
tax incentive or tax limitation programs (such as
NYC’s ICIP program or California’s Proposition 13) because these
programs
can distort the consistency and treatment of the tax pass-through
provisions. Also, electric rent inclusion, direct
utilities, and CPI, Porters’ Wage or other indices should be
checked as soon as the bills are received because each has nuances that can easily
result in significant overcharges.
Leases subleased out to third parties:
Because these leases have two sets of expenses that can have
opposite impacts on a tenant, the respective obligations must be
mapped out to determine if the charges from the landlord are
being properly synchronized with the obligations imposed on the
subtenant. A change to a lease’s operating year can have an
impact on a subtenant’s base year that can augment (positively
or negatively) the amounts payable by the subtenant for the life
of the sublease.
Leases within 2 years of termination or
renewal: Leases that are close to termination should be
looked at before the tenant’s financial leverage is lost.
Landlords are more likely to make adjustments if they hope the
tenant will renew and/or if significant amounts of rent have
yet to be paid. Also, if a lease is approaching renewal, an
audit can reveal weaknesses in lease language that can be
corrected during negotiations.
Conclusion
These factors can greatly increase the risk
of overcharges to a tenant and the presence of any of them
should serve as an indication that a more intensive review
should be performed. |
