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Case Studies

Case Study A

A review of expenses for a lease for a regional bank processing center did not show any significant increases, however, there was a decrease in electrical expense in spite of the fact that electric rates in this mid-Atlantic state increased. CRS 's discussion with the client's internal staff revealed that the client had removed some of their major computer equipment to another processing facility. The lease called for a direct credit of up to twenty-nine cents per square foot if the client ever reduced their electrical usage. In fact, the client's usage reduction resulted in sixty-nine cents per square foot when converted from cost per kWh hour.

After confirming CRS 's calculations, the client got 100% of the twenty-nine cents per square foot credit allowance. At 121,463 square feet, the client saved $38,679 for the 13-plus months since the equipment move and will save over $35,000 per year for the lease term.

Case Study B

A large national bank hired CRS to review 150 of their largest locations in the south. One location audited was 418,646 square feet with an 18-year 3-month lease starting in 1991. The client wanted an audit of the last three years due to the implementation of a 1997 Base Year.

Expenses over all were stable with only minor increases, but certain expenses were shared with other buildings in the complex under a third-party condominium agreement. CRS had to coordinate the audit between the client, landlord, and condominium association (which was a consortium of three different landlords). The Base Year detailed information was not easily obtained and any issues on current expenses would have to take Base Year amounts into consideration.

Two expense categories that required investigation were garage expenses and management fees. Both issues stemmed from our review of building income as it related to the calculation of management fees.

Garage expenses were to be included in operating expenses only to the extent they exceeded income. Our review of income clearly showed that garage income far exceeded expenses. Our initial claim was that all garage expenses from 1999 through 2001 totaling $736,032 must be excluded from expenses for those years. However, as stated previously, Base Year consideration greatly decreased that claim, as $202,826.25 of garage expenses was included in the Base Year. While the percentage of initial claim to total settlement of $736,032 to $128,479.96 was only 17.46% the client was informed that the Base Year adjustment would probably reduce the claim to about $130,000 at the outset. Due to constant communication and open dialogue with the client, as well as the landlord, the initial claim did not cause false expectations. This claim resulted in an additional $42,826.65 in reduced expenses in 2002 and will result in similar savings until lease termination. Also, the management fee issue resulted in savings of $5,824.58.

Case Study C

A large multinational corporation retained CRS as their exclusive lease audit provider. One audit location involved a 179,308 square foot space in its 13th year of a 25-year lease located in the northwest United States. Issues involved in the initial audit claim were:

1. The undervaluing of Base Year expenses and lack of gross-up for both operating expenses and real estate taxes for two separate base years, 1989 and 1994 (value - $1,296,039 current and $1,413,806 future).

2. The correct application of a complex annual expense cap over prior year's actual expenses (value- $725,375 current and $708,975 future).

3. The computations of the management fee within the constraints of the cap language (value - $482,000 current and $585,485 future).

4. The inclusion of disallowed expenses for the retail and parking component of the building (value - $85,075).

5. The reimbursement of audit fees due to exceeding a minimum allowable error (34% of recoveries).

All of the above current values are savings/overcharges through December 2001. The resolution of issue number two with respect to the annual cap along with statute of limitations rendered the issue of the Base Year moot. The issue of the annual cap was resolved, after some negotiations regarding lease interpretation, change of ownership and statute of limitations for $501,000 or over 69% of the initial claim amount. All future savings remained in place. The resolution of issue number three, management fees, was also reduced due to the cap application, change of ownership and statute of limitations for a total of $197,570.59. All future savings remain in place. The amount of issue number four, retail and parking expenses, was reduced, due to statute of limitations provisions and ambiguous lease language, to 50% or $42,500.

With respect to the reimbursement of the audit fee, the client asked CRS to settle at less than the total contingent fee for current savings, which was nearly $252,000. We did so gladly as the landlord, client and CRS worked methodically and amiably through all of the above issues.

The final settlement of the claims breaks down as follows:

Initial Claim (A) Total Savings (B) % A to B
Cap $1,434,350 $1,209,975 84.36%
Management Fee 1,067,525 783,056 73.35%
Disallowed Expense 85,075 42,500 50.00%
Audit Fee Reimbursement 252,000 70,000 27.80%
$2,838,950 $2,105,531 74.20%