Most tenants are cost conscious. They are always looking for ways to save a buck. And, when I am working with a tenant and their broker in negotiating a new lease, I look for ways to save money. Operating Expenses is a good place to start. How can we limit tenant’s exposure to Operating Expense charges and increases? I have written on this topic before (see previous post HERE).
But what about after the lease is signed? What happens when tenant gets the reconciliation statement after the end of the year? The tenant should be proactive and should carefully review the reconciliation statement. A savvy, experienced tenant should be able to determine if the landlord’s reconciliation is accurate or whether there are red flags that indicate a more comprehensive review, including audit, is necessary.
- The first step is to check the landlord’s math. No one is perfect. We all mistakes and everyone, including accountants, make math errors. It is not unusual to find money just by doing a simple math review. Also, make certain that tenant’s pro-rata share is accurate. This includes confirming that the building area is correctly stated.
- Verify that landlord has used the correct adjustment years. Should the increase in Operating Expenses be from the 1st lease year or from the prior lease year? some leases have different bases for different categories of expenses. Is CPI a factor?
- Have caps on controllable expenses been properly applied and itemized? It is important to run through the lease to make sure that all such expenses have been addressed and not inadvertently included in increases of non-capped expenses.
- Assure that there are no charges for expenses which are either specifically excluded from the definition of Operating Expenses or, where possible, not specifically included in the definition of Operating Expenses. If an item can’t fit into a defined category, can it be excluded? Investigate.
A tenant can save money doing a thorough review of an Operating Expenses reconciliation statement and inquiring about questionable or incomplete charges. Certainly, it is preferable to resolve issues at this stage rather than the time and expense of a lease audit. Tenant’s should take the time to be familiar with their lease provisions so that the reconciliation statement is not a surprise or difficult to understand.