7 Red Flags That May Indicate the Need For a Lease Compliance Review
Few areas hold as much impact on capital outlay as real estate and leasehold expenses. Ensuring that your company is not overpaying is integral to fiscal management.
1. Significant Jumps in Operating Expenses / Additional Rent
Performing a simple trend analysis of your year-to-year operating expense obligation is a must. And while inflationary and market forces generally create an escalating building operating expense profile, when you see a marked jump in expenses issued to you, a red flag should rise. Causes of significant jumps might include new and potentially lease impermissible capital projects, new expense categories not reflected in your base year, new contracts or vendor changes and/or related party issues, and newly increased or above standard services which are not reflected in your base year.
2. Change in Property Ownership / Property Manager
3. Building Undergoing Capital Improvements or Renovations
4. Your Lease is Commencing / Expiring
Perhaps the most valuable times to have a lease audit performed are at the commencement and expiration of your lease. If you occupy under a base year lease, the valuation of your base year will have
material impact on your leasehold expenses throughout the term of the lease. It is in your direct interest to both validate all charges in Year One, and to validate expense levels so as to not undervalue your base year. Likewise, lease audits should always be performed as a standard practice at any lease expiration. Not only might you lose rights to recoup any overcharges after vacating the premises (audit windows), you may lose significant leverages after your move. Lease audits and the potential uncovering of over- or mischarges may also have a material impact on any lease renewal negotiations and construction of lease amendment/renewal language.
5. Sizable Shifts in Building Occupancy Levels
6. No or Limited Backup Supplied to Annual Reconciliation Statements
7. Building or Landlord is in Financial Straits