Cash-strapped commercial real estate tenants are increasingly turning to the services of lease auditors to pare expenses and free up capital for other uses. The auditors are using Web technology to pinpoint potential areas for cost reduction, while keeping in touch with clients via secure Internet sites.
For a major tenant occupying a large commercial space, the potential savings are huge if a discrepancy is found between the expenses allowed by a lease and those actually charged by a landlord. A firm can reduce operating expenses by 10% to 20% in some cases.
“I once found a landlord charging probably 10 times the cost of certain cleaning supplies that the tenant would have paid had it been an independent cleaning contractor,” says Anthony Collura, president of Corporate Real Estate Services Inc. (CRS), based in West Long Branch, N.J. After an audit, the tenant recovered more than $1 million from the landlord.
In another case involving garage and management expenses, the tenant recovered $700,000 from the landlord, says Collura. Many financial recoveries are far smaller, however, such as the $38,000 returned by a landlord who had passed on electricity expenses to the tenant, with his own charges.
Business has increased 15% to 20% over the past 12 months at CRS. Some of the new clients asking for help are in dire straits, says Collura.
Most clients, however, simply want to improve the bottom line. “We deal with a lot of Fortune 1000 companies, so they're not so much underwater as they are looking to improve profitability.”
The roster of CRS clients includes Bank of America, CB Richard Ellis, Duke Energy, Kohl's Department Stores, Office Max, Trammel Crow, Royal Bank of Canada and Swiss Re financial services.
Technology has helped landlords and tenants to reduce operating expenses, although most CRS clients are tenants. Clients can log into the Web-based CRS system using a secure password to access the status of the audit work.
Generally, the more complicated a lease is, the more likely it is to become a candidate for audit, since simpler, more straightforward leases leave little room for misinterpretation, according to Collura.
Energy costs are a frequent target for close examination. “In most cases, landlords are not allowed to charge a premium on electric and make a profit passing through energy costs,” says Collura.
CRS reviews files and develops a report for the client recommending specific actions. During the audit, CRS informs the landlord of potential claims, and examiners review the landlord's records.
The tenant's site may also be surveyed. For example, CRS may undertake the physical measurement of a tenant's space to clarify whether the square footage stated in the lease corresponds with the actual space occupied.
At times, simple calculation errors are found — transposed numbers or a formula inaccurately applied. Some errors can lead to big overcharges for tenants.
The auditing firm represents the client to the landlord and negotiates on the tenant's behalf to come to a resolution. In about 90% of cases where inaccuracies are found, they were just “honest errors”, says Collura.