Your real estate portfolio represents one of your organization’s biggest operating expenses. And if you’re not careful, you could wind up paying a lot more for it than you have to. Lease audits are a crucial process for ensuring that you never pay charges you aren’t legally responsible for according to your lease agreement.
As landlords review operating expenses for their properties, they’ll often pass common area maintenance (CAM) charges to tenants that don’t qualify as tenant responsibilities under the terms of the lease. Whether you conduct lease audits through an outside firm or your lease accounting department, these help you identify overcharges by reviewing the language of your lease and evaluating whether the expenses qualify.
Lease audits almost always refer to what are more commonly known as CAM audits, and the two terms are often used interchangeably. But technically, the term “lease audit” can refer to a wider range of processes that involve reviewing lease documents. In some cases, a lease audit may focus more on examining the lease agreement itself, ensuring that the lease abstracts are up to date. And a lease audit may at times be slightly more expansive than a CAM audit, looking at the broader details of the lease, rather than strictly the portions that relate to shared expenses with co-tenants.
For our purposes in this article, we’re going to focus on the most popular understanding of lease audits and discuss everything retailers need to know about CAM audits. We’ll cover:
- Why lease audits are important
- When you should perform lease audits
- What lease audits include
- Whether you should perform lease audits in-house
- Tips for in-house lease audits
Audits provide tenants with the opportunity to detect overcharges, receive compensation, and save money with lower CAM charges moving forward. Common areas where a lease audit may reveal overcharges include:
- Base rent
- Pro rata share
- Gross-up calculations
- CAM expenses
- Real estate taxes
- Overtime services
It’s worth pointing out that finding an overcharge doesn’t necessarily mean that the landlord was intentionally scamming their tenants. While that scenario is possible, it’s even more common for landlords to simply not have the time to review each tenant’s lease to include only those charges that apply. Instead, they may assume that all tenants should be billed equally for all the common area charges.
Additionally, everyone makes mistakes, and that certainly includes your landlord. No matter how meticulous and aboveboard your landlord may set out to be, it doesn’t take much to transcribe a number wrong, resulting in charges you shouldn’t be paying. And this is especially true when a landlord has multiple properties and multiple tenants to keep track of. They will never be able to give your specific lease the kind of attention that you will.
As a tenant, if you choose not to perform a lease audit, then you’re simply accepting the fact that you may be paying more than your fair share. You won’t know for sure until you’ve verified that everything checks out. Depending on the scale of your lease portfolio and operations, lease audits can generate tens of thousands in savings each year. So it’s in your best interest to perform a lease audit.
Because lease audits are most valuable to tenants, a tenant is usually the party to initiate a lease audit. The tenant typically pays for the lease audit as well—unless the tenant has negotiated lease language that specifies the landlord will pay for the audit if it uncovers a agreed upon amount or percent of overcharges.
The landlord has much less motivation to see a lease audit performed, but any decent landlord will recognize that audits are a standard part of the process and are the right of any tenant if their lease allows for it. This is why it’s important that all tenants have audit language in their standard lease form, as well the right to reasonable requests for relevant information and supporting documents.
You’ll typically perform a lease audit in response to the CAM reconciliation you receive from your landlord, and those are due to you within 30 to 90 days after December 31, depending on the terms of your lease. It’s a good idea to perform a lease audit every year after receiving your CAM reconciliation to make sure your landlord’s calculations all add up, and that your year-over-year expenses don’t increase beyond the percentage defined in your lease (if that applies to you).
However, your lease will define the time period you have to perform a lease audit, and it’s usually several years. So if you aren’t able to perform an audit every year, or if you miss a year, you will have some time to catch up later. But the sooner you perform a lease audit, the sooner you discover potential overcharges, and the sooner you have a chance to receive back what you’re owed.
Lease audits go over any information needed to verify the accuracy of your charges, locate discrepancies, and determine whether you’re owed any compensation. They can include the terms of the lease itself, additional relevant documents, and the physical property space.
A lease audit starts with the lease itself. You have to understand what terms the lease specifies so that you can compare them against any CAM expenses.
Depending on how extensive the audit, this may compare the lease abstract against the original lease agreement and any amendments in order to verify that the abstract itself is accurate. Or it may simply rely on the abstract to provide the necessary details.
The lease auditor will be looking for details including:
- Base rent
- Percentage rent
- Proportion on additional rent
- Real estate taxes
- Repair and maintenance
- Exclusive right
With an understanding of the lease in place, an auditor will examine documents from the landlord that provide verification for CAM expenses or any other charges the tenant may have received from their landlord. By comparing these documents against the terms of the lease, an auditor can determine whether any discrepancies need to be addressed. The types of documents can include:
- Tax documents
- Landlord correspondences
In some cases, a lease audit may seek to verify whether the space specified in the lease matches the reality of the physical property. A center size can vary and change a tenant’s prorata share. If a landlord has overstated the center’s square footage, you may be paying for a higher pro-rata share of CAM expenses than should be required.
Verifying your property space may involve an examination of the site plan. Additionally, check to see if your lease states if you pay on Gross Leaseable Areas (GLA) – which is the space in a center that can be rented by tenants. This is important because any vacant spaces would be included in the center space total (denominator) which would reduce your prorata share. Your please may state you pay on GLOA “Gross Leasable Occupied Area” which mean only rented space would used to calculate total center size.
Lease audits are complicated, and the larger your portfolio, the more difficult (and time-intensive) the process becomes. So you may be wondering how you should go about it. Do you secure the services of an outside firm? Hire an independent lease auditor? Or perform your lease audits yourself?
Going with an outside firm or professional lease auditor can provide the comfort of knowing that your lease is being looked over by an expert who has your best interests in mind. It frees you from the hassle of doing it yourself, allowing you to stay focused on running your business. However, hiring a professional may cost a bit more than performing your lease audit in-house. And even though there’s a chance you could be reimbursed for those costs by your landlord, it may not cover the entire expense—especially if the auditor collects a percentage of their findings.
If you decide to do it in-house, you should be aware that lease audits can be a tedious and error-prone process, especially if you lease multiple properties or have a particularly complex lease agreement.
That being said, a lease audit only has to be as thorough as you want it to be. Technically speaking, any time you look at a bill and examine it against the lease, you’re auditing it. If you feel comfortable with the majority of charges you’ve received and only wish to audit a few specific items, then you may be able to knock it out in under an hour with no need to bring in a professional lease auditor.
A lease audit also doesn’t have to be done entirely one way or the other. Many businesses use a combination of in-house and external auditing.
If you do tackle some or all of your lease audits yourself, you’re going to need the right software to help you with the process. And that’s where we come in.
Should you decide to perform your lease audit in-house (or any portion of it), we can help. While it’s certainly convenient to work with a firm that specializes in lease audits, there are ways to streamline your internal process as well—which could allow you to keep more of the savings.
Here are three tips for conducting lease audits in-house.
One of the major challenges with lease audits is being consistent across your portfolio. Every lease is a little different. Landlords will use different terms for the same line items. What you might consider a single category of expenses could encompass several individual charges from an individual landlord. For example, one landlord may list snow removal, ice removal, and salting as three separate items, while another might lump it all under “winter parking lot maintenance” or simply “snow removal.”
This often leads lease accountants to either drop everything into an all-encompassing “miscellaneous” category or constantly create new line items. Neither of these solutions are ideal. By creating a lease audit template, you can work from a fixed picklist that encompasses the 20–50 expenses you care about. Then it’s easier to identify if a landlord’s description fits one of your key items, and you can apply consistency across the portfolio, while allowing room for personalization at the lease level. It turns lease audits into a repeatable process, and you can train people to complete it the same way.
With Tango Lease, building templates is a breeze. Create your picklist with the expenses that matter to your organization, then when you review your charges, simply match your landlord descriptions to these items.
When you keep your lease data in a folder full of spreadsheets, it becomes a lot less valuable. Sure, you can perform all the calculations you need, but the lack of organization makes it difficult to compare commonalities and identify inconsistencies.
You might miss, for example, that you have 10 leases with the same landlord, and one of those leases includes an expense that this landlord hasn’t charged on the others, or uses a different description. Or perhaps you have a dozen leases with similar language that didn’t consider HVAC repairs to be a tenant responsibility, and one landlord lumped it in with another category. Having the tools to analyze lease expenses in your portfolio helps inspire new cost-saving insights, making every audit more effective.
Tango Lease puts the power of big data to work, organizing your entire lease portfolio and giving you convenient filters to examine each lease in relation to your others.
Reviewing lease terms is a tedious process. Even with the best lease abstracts and plenty of time to dig through relevant clauses, you’re bound to miss some of the language that frees you from responsibilities. Similar wording or missing context can easily cause costly human errors.
That’s why Tango Lease applies automation to your portfolio. Our CAM/OPEX Reconciliation tool helps you review leases and charges to identify expenses you aren’t responsible for. It supports audits and helps youreconciles CAM charges, so you don’t have to worry about whether your team may have missed something. In fact, our CAM/OPEX Reconciliation tool can save businesses more than $100,000 in yearly overcharges.
Overcharges like these aren’t the only occupancy costs businesses tend to miss. Want to learn about more of these “hidden costs”? Download a free copy of The Lean Rent Playbook.
Companies like yours make lease overpayments all the time. It happens because both landlords and tenants lack the tools to efficiently navigate their lease portfolios. Even with a massive lease department, you’re bound to have human errors, especially with how difficult it is to detect some overcharges.
Tango Lease organizes your entire portfolio into an easily searchable database. You’ll have everything you need to analyze your leases and discover cost-saving opportunities.
Want to see how Tango Lease simplifies lease auditing?