KBA regularly publishes articles and newsletters on a range of topics concerning commercial leases and lease expense items. KBA’s articles offer practical advice on ways to improve control over your company’s real estate costs. Should you require information on a particular topic, or wish to submit an article for publication on our website, please contact us.
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Succumbing to Landlord Pressure to Limit Lease Audit Rights |
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Landlords don’t like lease audits and push very hard during lease negotiations to restrict tenants’ ability to audit their leases. Many tenants succumb to this pressure, without realizing that that these restrictions often undermine all of the protections that were negotiated into the operating expense escalation provisions. This article examines some of the arguments landlords commonly make with respect to restrictions on audit rights. |
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Lease Administration vs. Lease Auditing |
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Although lease administrators do a great job in reviewing and paying rents every month, it is very difficult for them to identify every billing anomaly that may exist. By supplementing its lease administration function with lease auditing, a company can cost-effectively reduce leasing expenses and improve its bottom line. |
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Commercial Lease Occupancy Cost Measurement |
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So you’ve got your leases abstracted, imaged and into a database or spreadsheet and life is good. You and your broker are handling renewals and the information to answer basic questions is at your fingertips. Then someone asks you a seemingly simple question: “What do we pay on average per square foot?” At first glance, it has a simple answer; or does it? |
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Expense Escalation Caps |
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Caps on operating expenses, taxes and similar costs in commercial leases are often misunderstood. Much of this is because of a lack of consistency in defining the different variables at play. As a result, caps are often confusing and difficult to administer. |
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Stop Giving Away Your Audit Rights |
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It happens all the time. A tenant discovers an overbilling in its rent but can’t do anything about it because it missed the 60-day deadline for notifying its landlord about the mistake. Tenants need to understand that these restrictions serve no purpose other than to inhibit them from the legitimate and fair business goal of ensuring that the landlord is charging them as agreed. |
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It's That Time of Year Again |
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At the beginning of each year, landlords reconcile their buildings’ actual expenses with the amounts contributed by their tenants during the prior year. Tenants must be careful when dealing with these statements. If no objection is raised, errors can become embedded for the entire lease term.
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Due Diligence: The Foundation of Lease Auditing |
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"We've retained a lease audit firm and they’ll contact you to set up an appointment." Landlords often dread the news. They rarely anticipate anything positive from a lease audit. They also fear that the lease audit firm may waste their time and drive a wedge between them and their “customer,” the tenant. But is this fear justified? What is the audit all about, anyway? What is the tenant seeking? |
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What Happened to that Great Lease You Negotiated? |
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It snuck away when you weren't looking! You spend countless hours negotiating a lease, getting it just right. And then something happens. When administering the lease you forget how hard you worked and lose control over it. Remember, negotiating a lease is not an academic exercise. If you do not keep control over it after it is signed, you will lose what you so strenuously fought for during negotiations. |
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Don't Get Shocked by Your Electric Charges |
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Electric charges are a significant part of building operating costs. Most leases require the tenant to pay for electricity used within the premises for lighting, computers and other equipment. Except for very large leases where the tenant usually shops rates directly with utility suppliers, the tenant’s electricity charges are governed by the terms of its lease.
Given the high volatility of utility rates, these costs must be monitored to ensure ongoing compliance with both the spirit and letter of the lease. |
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Don't Pay Twice for a Better Building |
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Tenants are often attracted to buildings because the buildings are undergoing renovations or other improvements to systems, appearance or operations. However, in base year leases, tenants can find themselves paying twice for maintaining these new improvements, and must protect themselves in their lease language from such an occurrence. |
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Reminder: The Clock Is Ticking... |
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In January, many tenants will start receiving their operating expense, tax, porters’ wage and other pass-through charges for their leases. Unfortunately, many tenants unnecessarily miss their annual audit deadlines and forfeit their right to recover rent overpayments. |
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Prepare Your Budgets Properly |
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When preparing budgets, it is imperative to realize that a tenant's liability for its share of increased operating expenses can rise at a completely different (and much higher) rate than the building's expenses. Although building operating costs may inch up by only 3-4% per year, your liability will usually more than double the first year and rise thereafter by around 50%, 33.3%, 25%, and so on. |
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Protecting Yourself in Base Year Leases |
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The Modified Gross Lease is the most favored form of lease for multi-tenant office space. However, if not drafted properly, a modified gross lease can cause a tenant to pay significantly more than understood by the parties when the deal was negotiated. |
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A CPA Certification is Not Enough |
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Most landlords employ a CPA firm to prepare the entity’s financial statements and tax returns. In many cases, a segment of the financial statements that are issued are delivered to tenants in support of their operating expense pass-through billings. Tenants must be careful to not rely on these statements to protect their rights. |
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Criteria for Selecting a Lease Audit Firm |
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Many tenants are retaining outside firms to audit their leases, and a number of firms are now offering lease auditing services to their clients. This article outlines several key criteria for selecting a lease audit firm. |
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Lease Auditing: What Is It and How Does It Work? |
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This article provides a thorough explanation of the lease audit process. It elaborates on the types of errors that occur in the billing process, the skills needed to detect overcharges, and possible methods of compensation. As lease auditing has become more widely used, the focus of the audit has also shifted from recovery of overpayments toward ongoing lease compliance and overall control. |
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Cost-Reducing Capital Expenditures |
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In a previous Newsletter, we wrote about how Capital Expenditures should be excluded from tenants' operating expense pass-throughs because they constitute ownership's costs to either 1) improve the property or 2) replace property components as they wear out, and both improvement costs and replacement cost are already captured by the base rent. However, many clients have asked us whether it is appropriate to allow capital expenditures that reduce operating expenses. This article explores the various situations and conditions in which it may be appropriate for a landlord to include cost-saving capital expenditures in a tenant’s operating expense pass-throughs. |
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Audit Deadlines Come in All Forms |
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During the next several weeks tenants will be receiving their 2003 year-end operating expense and tax bills. Unfortunately, many leases require the tenant to spot errors and bring them to the landlord's attention within a specific time limit—often 10-30 days after receipt of the bill. Be sure to check your leases for these deadlines, and pay particular attention to the form of the deadline. |
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Sarbanes-Oxley and Control of Corporate Real Estate Leases |
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Sarbanes-Oxley requires companies to certify the effectiveness of their corporate records and imposes criminal penalties for inaccurate reporting. Corporate real estate data is often incomplete as significant income and/or expense information is missing and reporting becomes flawed. This article discusses the need for companies to now develop and implement reliable and verifiable systems in order to gain control over the data, and over the systems used to produce this data. |
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Demystifying the Difference between Net and Gross Leases |
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In real estate, some of the most commonly used terms are “Net Lease” and “Gross Lease.” This article discusses structures such as net, gross, modified gross and hybrid leases. Because of the many different variations on lease structures, it is important to understand what these terms refer to and how they should be used. |
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Capital Expenditures - Includable or Not? |
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As a general rule, capital expenditures should not be included in tenant pass-throughs. This article explores the reasons why and how tenants must strive to keep capital expenditures out of the operating expense clauses in their leases. This article reveals how leases may be structured to include or exclude the various (and sometimes hidden) forms of capital expenditures, and how to properly account for such expenditures. |
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Negotiating Lease Audit Rights |
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Much time and effort is spent negotiating and drafting operating expense, utility, tax, insurance and other similar clauses in a lease. Yet, despite all of the “points” that tenants may win during the negotiation process, they frequently agree to restrictions on their ability to enforce these provisions. This article explores the methods landlords often use to limit audit rights, and the ways in which tenants can protect themselves. As long as leases contain complex financial terms, there remains a need for tenants to check that their landlords are complying with these terms. |
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Measurement of Square Footage |
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The size of the premises is one of the most important factors in the tenant’s leasing decision. It is imperative that this factor receives the proper attention during the lease negotiations and the drafting of the lease documents. This article discusses critical issues such as rentable and usable space, the different measurement standards applied, the linkage between size and rent, and how best to protect a tenant’s interest during the lease negotiation process. |
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Carefully Constructed Rent Escalation Clauses |
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A properly written lease is one that represents in writing the original intentions of the parties at the time of the lease negotiations. We have found that in many cases, rent escalation clauses were not well drafted, and the decisions that seemed reasonable and clear at the time of oral negotiations were not clearly expressed in the final lease document. This results in rent escalation provisions that are often unworkable in practical application. This article details the salient points that must be considered and clearly described when negotiating and drafting rent and rent escalation clauses, in order to avoid landlord- tenant disputes. |
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Negotiation Skills -- The Most Important Ingredient In Lease Auditing |
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In the final analysis, the value of a lease audit is measured by the amount of overcharge claims that the lease audit firm succeeds in recovering for the tenant. This article discusses the skills needed to achieve this success, and elaborates on the primary factors that should govern the actions of the audit firm in the identification, negotiation and resolution of the claims. |
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