A National Lease Advisors lease administration client occupies an entire 50,000 square foot office building in downtown San Francisco. National Lease Advisors performs lease audits of all operating expense statements received by our lease administration clients, ensuring that they are in line with industry standards and the lease agreement.
The Problem
Upon routine checks of the budgeted operating expenses, an 11% increase was observed, which triggered immediate concerns. This increase was notably divergent from the usual trend, and warranted further investigation.
Findings
Delving deeper into the individual line items, we noticed that the maintenance expenses had inflated more than other categories. This deviation from past trends seemed irregular, prompting us to closely examine the nature of the expenses listed under this line.
After a comprehensive review, we identified that several expenses, which were formerly not part of the maintenance category, were now being added. Conversing with the property manager, it was unveiled that these added expenses were, in fact, more aptly categorized as capital expenses as per the lease agreement.
This is a pivotal differentiation. Capital expenses, unlike regular maintenance expenses, are meant to be spread or amortized over their useful life. This means that the cost is distributed over several years instead of being entirely passed on to the client in a single year.
Resolution
Armed with our findings, we approached the property manager to explain our position. Fortunately, the property manager was receptive to our analysis and agreed to reclassify the expenses from maintenance to capital.
Outcome
This correction resulted in an annual savings of $50,000 for our client. Not only did this prevent an undue financial burden in the current year, but it also ensured that the costs were appropriately spread over the coming years, in line with the asset’s useful life.
Routine scrutiny and understanding of operating expenses can lead to significant financial savings. It is imperative for businesses to periodically review expenses, ensuring they align with stipulated agreements and to remain vigilant about any unexpected fluctuations. In this case, NLA’s proactiveness and comprehensive review led to a substantial annual savings for the client.