"Office Tenants Check for Lease Overcharges",
Wall Street Journal 3/13/02.
'Audits Spread as Landlords Get More Aggressive In
Passing on Costs'
By Sheila Moto
Uncle Sam isn't the only one performing audits these days. More
and more office tenants are taking a closer look at their landlords' books. The goal: to
make sure they are not being overcharged. What is typically a busy season for the
companies that conduct lease audits on behalf of commercial tenants is shaping up to be
even more brisk this year. Tenants that have the right to conduct such
increasingly want to make sure they aren't paying more for building operating expenses and
real estate taxes than their lease agreement calls for.
And in some cases, tenants with a big chunk of space available for sublease are making the
case that they shouldn't have to pay for some operating expenses, such as janitorial
services and utilities, on unoccupied space. The savings could be noteworthy for large
tenants in New York, where additional security and insurance costs have pushed expenses up
by about 50 cents a square foot on average.
Typically, a landlord incorporates a building's operating expenses and real estate taxes
into the rent tenants pay in the first year of occupancy. In subsequent years
increases in expenses over the base year are passed through to tenants unless they were
able to negotiate caps or exclusions. Tenants pay their portion of expenses each
year based on the landlord's estimates. The following year, landlords calculate the
actual expenses and send out a reconciliation statement to tenants, generally between
March and June, outling how much was overpaid or underpaid. This year, these
statements have started rolling in earlier than usual, say auditors.
Auditors contend that the cost of new or replacement equipment, such as energy-efficient
systems or elevators, is incorrectly making its way onto tenants' bills. Errors
stemming from calculating insurance and security costs are increasingly common given that
landlords who own several properties typically use umbrella policies and contracts to
cover their portfolio.
A Matter of Responsibility
Other miscalculations involve the amount of space for which the tenant is responsible for
paying rent and expenses, the expenses included in a tenant's rent for the first year, and
increases tied to a consumer price index or other cost-of-living increases. Fees
charged to manage the property also are a point of contention.