Lease audits are a necessary part of lease administration. Just as running a corporate real estate portfolio is complicated for you, running a building is complicated for your landlord. Sometimes landlords make mistakes, and frequently, those mistakes are in his favor. Auditing is the best way to ensure that you're not only paying what you should relative to your lease, but that your expenses are in-line with the market and other properties you occupy. Here are five rules to follow to make lease administration and auditing easier for you:
1. Start With A Complete and Correct Lease or Abstract
If you've been a tenant for a while, it's conceivable that your lease document could be long and complicated with multiple addenda changing terms both in the original document and changing terms in other addenda. Nevertheless, to have an accurate audit, you will want to start with a complete lease so that you can compare what you're paying against what you should be charged.
Simplify the process by working off of a professionally prepared abstract. Whether you, your corporate real estate broker, or a lease administration service provider does it, the abstract can organize the process for you. If you've computerized your leases by entering their business points into your company's commercial real estate software, you can also audit against that record.
2. Audit Now and Before
Typically, audits compare rent and common area charges to the current year's scheduled rent and CAM estimates. Once you've confirmed that you're paying what you should this year, take a look at it relative to previous years. If an expense line has unexpectedly skyrocketed, you might want to inquire about it. Historical reports from lease administration software can make this an easy task.
3. Go Beyond Expenses
Auditing operating expenses is only part of the process. Look carefully at how rental increases are applied and compare your rentable square footage on your statements to what your lease says. You could be paying too much. Rule 2 applies here, too - your landlord could have incorrectly applied a rent increase years ago, and you might not have noticed it if you only audited against last year’s rent.
4. Benchmark Against Other Properties
Look at what you're paying at each property relative to similar properties in your portfolio. Also, if you have the available data, relate it to what other tenants are paying in your property or in similar buildings. If you have two spaces that are essentially identical in size but you're paying for 5,000 square feet in one and 5,800 in the other, your landlord might have miscalculated your load factor. When your operating expenses are $19 per square foot and comparable buildings cost $15, it may be a sign that you’re overpaying.
5. Do It (Or Get Help)
While lease administration can be time-consuming, the most important thing about lease audits is to just get them done. Given the high cost of corporate real estate, even a small error could cost your company thousands of dollars ever year. An audit that stops the issue will turn you into a hero to management. If you're really too bogged down to do it or you don't have right software to simplify the process, you can also get help. Accountants and corporate real estate service firms can do your lease audits for you, saving you time and providing full benefit.
