It is that time of year where commercial real estate tenants are starting to receive their 2020 operating expense reconciliation. At National Lease Advisors, our lease audit team sees firsthand how landlords overcharge tenants millions of dollars in these operating expenses, also known as CAM charges, each year. Our group alone will annually identify over $1 million in erroneous costs for our clients through lease audits, and that is just scratching the surface in the vast universe of leases.
With many companies in cost-savings mode and fighting to get through this COVID-19 recession, there has never been a better time to review and validate operating expense charges for accuracy and ensure they comply with the lease. The process is simple, the savings can be significant, and tenants have nothing to lose by practicing this exercise. Unfortunately, most tenants do not give the statements the attention they deserved before adding to the pile of invoices to be paid.
Mistakes Are More Prevalent Than One Would Expect
Having audited leases for over a decade, what clients are surprised to learn is mistakes are quite common. Unlike the base rent, which is stipulated in the lease document and known from the onset, the calculation and preparation of CAM charges can fluctuate wildly between different owners and property managers.
So how can mistakes in operating expense charges be so common? We have found that 95% of questionable operating expense charges result from three things:
- Landlords not accounting per industry standards;
- Landlords not honoring the lease provisions; and
- Human error.
Typically, the leading cause is unintentional human error. Still, often we will find landlords are taking advantage of the blind trust that tenants so often have for their landlord regarding their rent and CAM statement.
There is also the misconception that the operating expense statements have been vetted or prepared by CPA-level accountants that rarely make mistakes. The reality, and more typical scenario, is that property managers lead the process in preparing the budgets and reconciliations. Accounting team members who participate in gathering data and allocating between tenants do so with little knowledge of what protections exist in the various lease documents.
The unfortunate reality is many tenants receiving the reconciliations do not understand the mechanics of how CAM charges are calculated and will often approve the invoice for payment without the scrutiny it requires.
What Tenants Can Do to Protect Themselves
Tenants must review and challenge increases that do not seem reasonable. Since the presentation of expenses can be confusing to individuals without a background in property management and operations, turning to a third-party consultant like National Lease Advisors for a lease audit can help overcome this roadblock. When searching for a lease audit firm, it is essential to find and work with a highly regarded firm with a proven track record.
At National Lease Advisors, we will review hundreds of CAM statements for our clients this year and save them a significant amount of money by finding erroneous charges not permitted under the lease.
Understanding the Review Process
Most reputable lease audit firms, like National Lease Advisors, will provide a complimentary CAM review with just the lease document and the most recent CAM statements. This initial review can provide businesses with peace of mind that the charges are reasonable or raise concerns that may merit further investigation.
If red flags are raised and are material enough for further investigation, the lease auditor will reach out to your landlord to inquire about the charges in question. This stage is not accusatory towards the landlord but merely an opportunity to ask questions or highlight what one believes may be inconsistent with the lease.
Impact on Tenant/Landlord Relationship
Some tenants may be concerned that an inquiry or lease audit, especially by a third-party consultant, will negatively impact their relationship with the landlord, but the right lease audit firm will have the opposite effect. National Lease Advisors acts as an intermediary that can keep emotions out and limit the inquiry’s focus to items that we know from experience do not seem accurate. Our auditors come from the landlord side of the table and understand how to connect with property managers in a fair and balanced manner. We also know when an expense is reasonable or unreasonable and avoid challenging charges that are unlikely to provide savings.
Do Not Let Lease Audit Provisions Hold You Back
Many tenants mistakenly believe they do not have the right to question landlord charges unless they exercise the lease’s audit rights. Even worse, tenants without lease audit rights assume they have no path to investigate. But it is unnecessary to exercise a lease audit to question the validity of charges. At National Lease Advisors, we rarely trigger the lease audit provisions of the lease and instead act as trusted advisors who help ensure the terms of the lease are being fulfilled by both parties.
Having reviewed CAM charges for over a decade, I can share that the lease audit language provided under the lease does little for the tenant and actually does more to protect the landlord. From limited windows to exercise these rights or the need to hire a national accounting firm (most of whom do not even provide lease audits), the language is a fear tactic intended to prevent tenants from rightly investigating the charges’ validity.
Many tenants also hesitate to hire a consultant because the lease does not permit lease audits on a contingency basis. This restriction is one reason we act as a consultant and not auditor in the landlord’s eyes, thereby preventing tenants from pulling the “audit card” on their landlord.
Ultimately, it is very unusual that the need will arise to review the landlord’s books and records, which is what the audit language in the lease covers and where boundaries are imposed. At National Lease Advisors, all we need is your operating expense statement and the lease, no need to dive into the landlord’s books.
Conclusion
For tenants paying significant CAM charges, it is critical to review the 2020 reconciliations presented by the landlord for accuracy. People with good intentions are preparing these statements, but mistakes are prevalent, and the savings opportunity is significant.
National Lease Advisors lease audit team can help tenants navigate this process with a complimentary review and proceed on a contingency success basis if both parties agree that such an effort would benefit the tenant.
Please reach out to us at [email protected] to learn more or have your CAM charges reviewed.