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The Top 5 Things to Know About Lease Audits

1/13/2020
In the world of commercial real estate, lease audits can be an important tool for brokers to ensure their clients get a fair deal as related to operating expenses.

Lease Audits Article

At Cushman & Wakefield Dallas, we utilize the critical audit matters (CAM) review process to identify any potential issues or gray areas of a lease’s operating expense billing, and then to help correct the situation. This ensures that tenants and landlords are on the same page, which eliminates a wide variety of potential problems.

Of course, audits can be complex, making it challenging for brokers and their clients to know what to expect. Here, we explore the top five things to know about the lease audit process to ensure your next CAM review goes smoothly:

  • Know your audit rights.

Most office leases have audit rights restrictions that limit the scope of a tenant’s review of expenses. However, even if your lease is silent regarding the audit rights, that doesn’t necessarily mean that the tenant cannot review the landlord’s operating expenses. Most states have laws that would allow the tenant the ability to review the expenses from a written contract.

  • Keep in mind typical audit windows.

Most leases allow tenants to review the annual CAM reconciliations within 30 to 180 days of the date the tenant receives the landlord’s statement. Leases with short audit windows—such as 30 days from receipt of the landlord’s statement—require the tenant’s immediate attention to exercise their audit rights.

  • Remember that the landlord’s approach is going to favor the landlord.

Landlords often try to charge and pass-through to tenants all capital expenses, expenses for other properties, and certain fees and expenses. Many provide little supporting documentation. Meanwhile, landlords sometimes don’t pass on tax refunds and benefits that are due back to tenants.

  • Understand why CAM reconciliation leads to a balance or credit due.

The result of the reconciliation is going to be either a credit or a charge to tenants, based on the estimated amounts they paid during the year. If the tenant’s balance is a credit, that doesn’t mean that landlord’s billing is accurate; it may simply be a result of a high estimated amount pre-paid by tenants. Most leases require tenants to pay the balance due within 30 days. However, it’s important to note that paying the balance due doesn’t mean a tenant waives their audit rights provided in the lease.

  • Remember: Who reviews your annual CAM reconciliations does matter.

Finally, it is important to have an experienced and trusted partner to review the annual operating expenses statements. The advantage of having an experienced professional review tenants’ expenses is that this individual can argue on behalf of tenants on any disputed items that fall under “gray areas” of the lease and to avoid setting a precedent of unauthorized pass-through expenses for future billings.

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