Prepare for 2021 with a Lease Audit

With Operating Costs likely increasing in 2021, how should you prepare?

The global pandemic has shaken the commercial real estate market. Many organizations still remain closed, vacancy rates are increasing, and Tenants are looking to shed excess space to decrease costs. As we head into the last month of 2020, many Tenants asking, “how should I prepare for the uncertainty of 2021”?

In response to COVID-19, Landlords have increased their cleaning protocols, added social distancing signage and updated air filtration systems, to name a few. While vacancy rates are increasing as many spaces sit empty and many employees are not yet returning to the office, Tenants are expecting their additional rents to go down, while Landlords are looking to push costs of increased COVID-19 protocols to Tenants.

According to most leases, Landlords have the right to make adjustments at any point in the lease, and can increase or decrease operating costs, if it’s reasonable to do so. While most Landlords have not done so, it is clear status quo will not remain.

What can you do to prepare? It’s imperative that Tenants set up a baseline by way of a Lease Audit. This means:

  1. Be Proactive. Contact the Landlord about reconciliation to date and ask about what to anticipate going into 2021. This will allow you to understand your current operating cost structure, how you are being billed and what changes in costs are expected.

     

  2. Examine Your Lease. Take a look at the language in your lease to understand the rights required to challenge the additional costs. In many leases, Tenants only have a limited amount of time to ask for documents/information from the Landlord. Understanding the rights you have are important in the event that you are being charged more than your appropriate share as per your lease.

     

  3. Do a Lease Audit. We know that every penny counts, especially those belonging to you and not the Landlord. A lease audit is an invaluable tool to identify billing errors that often occur in commercial real estate leases, recover overcharges, and ensure future billings are done according to your lease. By reviewing your unique lease documents and the Landlord’s year end reconciliation, you can assess whether the company is paying its property owner more money than is legitimately due.  

The Lease Audit process does not disrupt the Landlord-Tenant relationship, if anything it makes it more transparent and stronger. Landlords don’t want to create the perception that they are overcharging Tenants, so they want to work with the Auditor and the Tenant to rectify any overages made in error.

Whether this is your first time conducting a lease audit, or you have engaged in a lease audit previously, with operating costs likely changing dramatically, this is a crucial year to initiate a lease audit.

For more information on the process, or to start your Lease Audit please contact your Cresa Advisor. 

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Chris is joined in the studio by Jim Travers, founder and chairman of Travers Cresa, a tenant-focused brokerage. Jim gets real about his long career in real estate, starting in New York in the 60's and then making the move to Los Angeles. Jim's "old school" approach to making deals and his willingness to embrace new technology have proven to be a successful combination for him, and he isn't shy to go into detail about how he conducts his business. A truly fun and engaging conversation!