Auditing Your Landlord's Books
Commercial tenants should anticipate the arrival of your OPEX Reconciliation(s). Based on the frequency of errors I found in auditing the prior year's Reconciliations, and the continued staff reductions at most major real estate firms, I have to believe errors will be even more pronounced this year. In my newsletters over the past 15 years I have discussed just about every aspect of the lease auditing business, so I will simply give you a few reminders as to why this is not an area you should overlook.
- Lease related expenses typically make up the second highest item of cost for most organizations after labor, and a tenant’s obligation to share in the cost of Operating Expenses, Taxes and Utilities make up a large portion of those costs.
- Leases are complex documents, and OPEX language is often not as clear as it should be leading to landlords applying an approach inconsistent with a tenant’s interest. Whether these errors are intentional or not is not the issue as the result is the same.
- While most commercial leases share a common structure, leases are individually negotiated and almost always contain certain unique terms that must be applied to each tenant’s bill separately. Many landlords do not bill each tenant according to their individually negotiated lease terms, but instead follow the building’s standard lease. Well over half of all errors I uncover annually are the result of a careful review of my client’s individual lease language and correcting the landlord’s as to their interpretation. I often tell my clients that my legal background is much more significant to my success than my background in real estate or accounting.
- Even though your landlord’s C.P.A. firm may have certified your landlord’s financial records, they almost never certify each tenant’s bill. Furthermore, landlord’s C.P.A. firms typically certify that the operating expenses are properly treated from an owner’s point of view for financial reporting purposes, not from the point of view of a lease’s pass through clause. This is most common when dealing with capital expense items and the proper amortization of those costs when permitted by Lease Agreement.
- Your bill as issued is final if not questioned during the audit period as negotiated in your lease agreement, and the audit window may be as short as 30 days form the date of receipt of your annual reconciliation.
- Auditing large leases is something that should be done on some regular basis, but also consider leases where a renewal or a lease termination is contemplated, a change of ownership or property management firm has occurred.
About the Author
Steven Goldstein is a former tax attorney, and president of an N.A.S.D. Broker/Dealer working extensively with real estate investments who has worked with organizations and individuals of all sizes who choose to identify and then take action on issues affecting their profitability and/or return on investment.