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What Are Common Errors Uncovered During a Lease Expense Review?

Many organizations place a leap of faith in their landlords and internal audit teams, often assuming that their leases and year-end reconciliations will be error-free.

In reality, around 70% of the files our auditors examined contained errors – from errors in accounting software to changes in “cosmetic” capital improvements – reflecting the importance of adopting a proactive approach in lease expense reviews to ensure landlord compliance with what was agreed upon in your lease, versus what was actually charged to you.

While mistakes made by landlords are typically unintentional, they inevitably impact the tenants who are often being charged incorrectly.

Among errors uncovered, several recurrent themes emerge:

  1. Calculation errors in accounting software: Not all software platforms are equipped to handle the complexities of lease agreements comprehensively. Some lack the sophistication required to accurately capture all inclusions or exclusions specified in the lease terms.

  2. Changes in tenant's proportionate share: We often encounter situations where the tenant's premise was either incorrectly measured – either not using BOMA Standards or not including specific BOMA Standards in the lease – or not measured at all. Another error we run into is that the building's leasable area was incorrectly determined, leading to an incorrect proportionate share.

  3. Duplication of expenses: Tenants often pay without knowing administrative expenses, administrative fees and management fees. Unless the lease specifically allows the landlord to recover all those expenses, tenants should pay only one administrative fee to cover for all administration costs the landlord incurred to operate the building/property.

  4. Improper "gross up" of expenses: Calculation errors further impact the issue, ranging from simple mathematical mistakes to formulaic discrepancies. Improper gross-up of expenses, a critical component in lease expense calculations, can skew financial obligations, leading to inequitable outcomes for tenants.

  5. Improper pass-through of operating expenses: Landlords may unintentionally pass through expenses, such as capital expenditures, interest charges, or reserve fund allocations, that are supposed to be excluded according to lease agreements.

  6. Incorrectly calculated base year: Errors can be as simple as landlords miscalculating statements’ base year. Failure to accurately establish the base year for expense calculations can distort subsequent evaluations.

A client success story that exemplifies the importance of lease reviews

To better understand how our team uncovers errors during lease expense reviews and secures refunds and future savings, consider the case of a multinational retail chain store with a sprawling portfolio of over 160 leased locations across Canada.

Cresa was tasked with reviewing 40 lease documents and reconciliation statements, laden with major issues and complexities.

Despite the hurdles, the team successfully navigated through these challenges and brought the projects to fruition. In the process, we uncovered multiple errors, including the recovery of capital expenditures in the fiscal year in which they were incurred versus being amortized over the assets’ economic lifespan; the duplication of management fees; the recovery of administration fees on excluded expenses; and the recovery of a management fee that exceeded the maximum cap allowed.

The diligent efforts of our Lease Expense team yielded remarkable results, recovering $260,000 in savings in only one year from the beginning of the review, and hundreds of thousands in future savings.

By now, you should have received your year-end reconciliation statements from your landlords. This juncture presents an opportune moment to conduct at least an annual desktop review — a high-level review of the expenses paid, compared to what is indicated in the lease agreement. This proactive approach allows you — the tenant — to uncover potential errors or discrepancies early on, empowering you to address any issues promptly and ensure you are being charged accurately and within your lease agreements.

To have our Lease Expense team look at your year-end statements, or to learn more about the Lease Expense Review process, please reach out to Maria Nenciu, our Senior Lease Auditor, at the contact information provided, or contact your Cresa Advisor.