KBA has audited over 70,000 leases and has settled more than 12,000 cases. KBA has the proven experience to know what can be corrected, what cannot be corrected, and how to work within existing lease parameters to achieve results. The following case studies are intended to provide a sampling of KBA’s achievements. New case studies are published regularly to provide a better understanding of new approaches to key issues.
Correction of Porters Wage Escalation Saves Bank $1.4 Million
ClientA major national bank in New York City.
Audit DiscoveryClient 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.
ResolutionAfter 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.
Correction of Drafting Error Saves Tenant $1.5 Million
ClientA Fortune 100 global telecom company that occupied multiple buildings in an office campus.
Audit DiscoveryThe lease described in detail how the rent was to be determined—how it was to be calculated on a specific finished building size at a specific rate per square foot. The lease also called for a separate adjustment in rents on an annual basis. Because there were multiple buildings with different commencement dates, to clarify the rents, the parties executed an amendment that set forth a schedule of rents for each space and for each year. For 8 years the landlord billed all of the charges according to the rent schedule, and also billed the tenant for the separate adjustments called for by the lease. KBA verified that all of the charges were consistent with the rent schedule and the adjustment clause.
KBA’s audit process did not stop there. KBA then recalculated the rent schedule in the amendment to verify that the negotiators and attorneys drafted the lease properly. By doing so, KBA discovered that the rent schedule not only included the underlying rents, but also incorporated all of the annual increases. Apparently, when the attorneys drafted the amendment, they neglected to void the annual increase language. By billing the tenant for these increases, the landlord collected them twice—once in the rent per the schedule and again in the separate charges.
ResolutionDespite a complete lack of documentation, KBA demonstrated that the lease’s written description of rent reflected the true intent of the parties, and proved that the rents in the amendment created a windfall for the landlord. KBA was able to convince the landlord that the rents that had been billed for 8 years were incorrect, and recovered $1.5 Million in savings.
Publishing Company Saves $57,000 per Year by Negotiating Lower Telecom Rates
ClientA publishing company with several offices in Canada.
Audit DiscoveryOur client had negotiated an agreement with a major telecommunications company for the bulk of their services. Due to their large volume, the supplier assured them that they were receiving a very competitive rate. They also used three other companies for their telecom needs as each of their offices had its own particular choice of carrier.
After a thorough analysis of the client’s supply contracts and billing data, our team identified that many of the services were not being billed at the contracted rates. Moreover, the contracted rates were not competitive given the client’s substantial volume.
ResolutionBased on these findings, our team secured a credit from the existing supplier for the overcharges and recommended that significant savings could be gained by combining all of the client’s telecom traffic with a single supplier. The client implemented these recommendations and now has the benefit of centralized billing reports from the selected supplier as well as the negotiated lower rates. This is generating in excess of $57,000 per year in savings for the client.
Correcting Measurement of Office Space Saves Tenant $187,000
ClientMajor consulting company that leased 100% of an office building in North Carolina.
Audit DiscoveryThe lease provided that the tenant was to pay a fixed amount per “Rentable Square Foot” for its space. The number of Rentable Square Feet was estimated in the lease, and was subject to adjustment once the premises were occupied. After the tenant moved in, the landlord submitted architectural drawings and plans to support a measurement of 42,450 Rentable Square Feet, and the tenant proceeded to pay the rent based on that size. In reviewing the file several years later, however, KBA discovered that the number of “Rentable” feet was not properly defined and that the measurement standard the landlord used was incorrect.
The standard the landlord used was the one intended to measure the space when a tenant leases an entire building. KBA concluded that the proper measurement standard should have been the one used when a tenant leases out normal multi-tenant office space. This subtle distinction meant an 8% difference in the rent, because the measurements for multi-tenant office buildings are taken from the inside wall to inside wall, and omit unusable space and vertical penetrations, whereas the measurements for entire buildings are taken from outside wall to outside wall and include everything inside.
ResolutionKBA argued that the totality of circumstances in the case led to the inescapable conclusion that this lease was intended by the parties to be much more like a multi-tenant office lease than like a lease of an entire building. It was merely coincidental that the tenant needed the total amount of space in the building, as demonstrated by internal tenant memoranda and correspondence during lease negotiations. Furthermore, unlike most full-building leases, this lease gave the landlord full control over building operations.
The most decisive factor, however, was that the lease gave the tenant the option to relinquish portions of its space at certain intervals. Had the building measurement been set at the ‘full-building’ standard, exercise of this option would have required the lease square footage to be completely recalculated.
KBA was able to clearly present its position to the landlord, and the landlord agreed that the rent should be recalculated based on a multi-tenant office measurement standard rather than the larger, entire building standard. This resulted in an immediate refund and a reduction in the rent for the entire lease term, saving the tenant $187,000.
Reduction of Freight Elevator Charges Saves Tenant $320,000
ClientSecurities trading firm that leased a large portion of an office building in New York City.
Audit DiscoveryThe landlord was billing for after-hours freight elevator service despite the fact that the lease required that such elevators were to be at no additional cost. The Building has two freight elevators that are available 24/7, which are used for its workers and for deliveries of lunch orders, furniture, equipment and construction materials. The Rules and Regulations of the Lease provided that “Each tenant agrees to pay for use of the service elevator at reasonable rates prescribed by Landlord, as set forth in the Lease” and that “bulky materials may not be delivered during usual business hours.” However, the lease provided that “Landlord shall provide, at no cost, necessary elevator service (including freight elevators) during Business Hours and shall have at least two (2) elevators subject to call at all other times.” The lease also provided that it would supersede any inconsistent rules and regulations.
The landlord billed the tenant $150 per hour for use of the freight elevators outside of Business Hours. During some of the same after-hours time periods, the freight elevator was also being used and paid for by other tenants in the Building. Furthermore, the landlord included the cost of providing after-hours elevator service (engineer, elevator operator) in operating expenses.
ResolutionKBA negotiated to remove the $150 per hour charge for use of the freight elevator except for the limited cases when it was being used to deliver construction materials. The landlord also agreed that when multiple tenants were using the elevators, the costs would be allocated among them. Finally, the landlord agreed that the cost of providing the elevator service would not be included in operating expenses because they were already being paid for directly by the tenant(s). The settlement saved the tenant $200,000 through the current year with a projected continuing savings of about $40,000 per year.
Reversing Expansion of Building Size Saves Tenant $190,000
ClientInsurance company with a 20,000 SF lease in a suburban office building.
Audit DiscoveryThe 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.
ResolutionKBA 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.
Correction of Base Year Saves Company $2.5 Million over Life of Lease
ClientFortune 100 Company located in Atlanta, Georgia.
Audit DiscoveryThe lease term was 25 years, with an adjustment to the Base Rent every five years to bring the rent to current market levels. Part of this quinquennial adjustment was to add the tenant’s most recent increase in operating expenses and real estate taxes to the annual rental rate paid for the prior year. By doing so, prior year increases in expenses and taxes were built into the current adjusted rental rate.
Through our audit process, we discovered that each time the rent was updated, the landlord failed to change the Base Year to the current adjustment year. This error created a compounding of the expense increases in each five-year renewal term. As a result of this error, our client was overbilled approximately $500,000, which if left uncorrected, would cause rent overpayments of over $2.5 million over the life of the lease.