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Lease Audit - Solutions - Case Study

Improper Assessment of Asset Management Fee and Salaries

At the request of National Corporation (the "Tenant"), CRS conducted a review of the operating expense invoices and associated supporting material related to the lease ("Lease") for property located at 525 Corporate Road between National Corporation and AMD Properties (the "Landlord"). We specifically examined the records for the years 1997 through 2001. Based on our review we noted the following discrepancies in the Landlord's application of operating and other expenses allocated to National Corporation under the Lease:

Costs of asset management are typically an ownership expense and not an operating expense. The Lease specifically states the types of Landlord employee expenses that are allowable as operating expenses, and states in Section 1.1.d: 

"Compensation provided in the form of wages, salaries and other compensation and benefits (including insurance, welfare, retirement, vacation, holiday, sick pay and other fringe benefits) as well as any adjustments thereto for the following classes of employees, employee of agents, or agents of Landlord performing services rendered in connection with the management, operation and maintenance of the Land and the Building in proportion to the actual amount of time spent performing such services.

i. superintendent of the Building;
ii. Building department heads and assistants;
iii. Clerical and accounting staff…"

Thus, Building superintendent is the highest level of employee that the Landlord is entitled to pass through as an operating expense. Stated another way, there is no provision in the Lease by which the Landlord can legitimately assess as an operating expense the asset management fees, inflated asset manager salary, and other salaries that the Landlord improperly included as part of National Corporation's operating expenses.

The salary expenses actually included in the operating expenses are, among other things, at various times, the salary of Mr. John Green, who pursuant to his affidavit is the "Asset Manager," and Mr. William Black and Richard Harrison, both of whom are described as Building Superintendent.

Mr. Green functionally acts as the Building superintendent not only for 525 Corporate Road, but also for another significant multi-tenanted office Building adjacent to the subject building. Thus, although a portion of Mr. Green's salary may be allowed as an operating expense, charging his entire salary to the Building is a gross overcharge. Additionally Mr. Black and Mr. Harrison are principals of the ownership group and were not and are not active in the daily management, operation and maintenance of the Building.

The inclusion of these items (Asset Management Fee and the salaries for Mr. Green [not allocated] and Mssrs. Black and Harrison) resulted in significant increases in Building Management salaries since the Base Year. Details of these overcharges are listed on the attached Schedule 2, Salary Comparison. What is most interesting about this discrepancy is that in 1996 the salary expense for Building Property Manager was $38,303.49; this amount should be starkly contrasted with the sums that the Landlord later assessed as operating expenses under the Lease:

     1997             1998             1999            2000           2001
$42,916.95 $118,715.63 $89,851.85 $154,900.33 $151,831.67

The Lease exclusions contained in Section 3.4.c expressly state that the Landlord can not charge for "Landlord's general corporate overhead and administrative expenses, including wages and benefits of Landlord's staff employees (except as described in section 1.1.d:)."

Based on the above, the Asset Management Fee of $45,000 in 1998 and Mssrs. Black's and Harrison's salaries in 2000 and 2001 are not allowable operating expenses. Additionally, as Mr. Green allocates part of his time to managing another similar property, no more than one half (and possibly less?) of his salary may be chargeable as an operating expense under the Lease. In fact, during our initial audit we were informed that the base year salary was so low due to the fact that the Building's Manager's time and expenses were allocated to other properties.

The effect of these adjustments is detailed on Schedule 2, Salary Compensation - Proposed Adjustments, and results in a reduction of operating expenses (management salaries) in the amount of $366,594.28 from 1998 through 2001.

Schedule 2 - Salary Comparison

1997

1998

1999

2000

2001

Building Manager Salary (A)

42,916.95

73,715.63

89,851.85

 

 

Asset Management Fee (B)

 

45,000.00

 

 

 

General Bldg. Maint. (Building Manager) (C)

 

 

 

62,009.74

71,831.63

Building Superintendent (D)

 

 

 

92,890.59

80,000.04

 

 

 

 

 

 

Total

42,916.95

118,715.63

89,851.85

154,900.33

151,831.67

 

 

 

 

 

 

Percent Increase over Base

 

177%

109%

261%

254%

 

 

 

 

 

 

Proposed Adjustments

 

 

 

 

 

(A)

 

(36,857.82)

(44,925.93)

 

 

(B)

 

(45,000.00)

 

 

 

(C)

 

 

 

(31,004.87)

(35,915.82)

(D)

 

 

 

(92,890.59)

(80,000.04)

 

 

 

 

 

 

Total Exclusions

 

(81,857.82)

(44,925.93)

(123,895.46)

(115,915.86)

Conclusion:

National Corporation is owed a credit in the amount of $366,594.28