Which Leases Are Good Candidates for Audit?

How to Identify the Key Indicators


There are many factors that can increase the risk of overcharges to a tenant. Most of these relate more to the nature of the transactions than to specific behavior of a landlord, but nevertheless, if a location is in a higher risk category, a tenant would be well-served by investigating the charges with a higher level of scrutiny.
Complex leases. These locations are more prone to error because of the number of moving parts within the documents themselves. Locations can be complex by virtue of a number of factors, including having multiple spaces under different amendments or leases in the building, the presence of multiple expense pools (common for mixed use properties), and having highly negotiated inclusion and exclusion definitions in the operating expense language (such as gross-up language, capital expenditure language, etc.).

A location that tests positive for ANY of these risk factors should be evaluated further to determine if the charges were calculated correctly.
Larger / more expensive leases: Although all leases should be subject to routine reviews, as a rule of thumb, all leases over 30,000 square feet should be examined automatically because even small errors can be significant when translated to cumulative liability. Individual expense line items that are more than 15% higher than similar buildings in the same market should also be investigated to determine the reasons for the variance. Leases with significant sundry charges such as overtime HVAC, cleaning or freight elevator use should also be examined closely for those issues.
Leases with significant or unexpectedly high costs: Specific expenses should always be examined when they fluctuate unexpectedly or when they have risen faster than inflation or when they deviate from plan. These abnormalities can be indications that the landlord is not being consistent in its treatment of expenses or is misinterpreting the lease. In addition, leases in which total expenses have risen by more than $0.45 per foot in any one year should be automatically examined.
Leases in buildings where ownership has changed: Changes in ownership often bring changes in methods of accounting and management philosophies. Depending on the type of lease (gross, modified gross, net), these changes can have unintended adverse effects on a tenant’s charges. For more information see: www.houstonrealtyadvisors.com or www.houstonrealtyadvisors.net