Integral to every tenant-landlord contract, leases form the basis of every rent agreement. This document highlights the duties and responsibilities that both parties are subject to. Generally, a well-written lease provides stability and clarity for tenants and landlords.
By referring to the terms outlined they can function harmoniously. Unfortunately, not all agreements are transparent and mutually beneficial. Even the best lease agreements are fallible and sometimes these unfavorably favor the landlords' side.
The necessity of Lease Audits
The necessity of Lease Audits
A lease audit is necessary in such cases. If any party feels that they are making payments higher than the estimate, they can ask for a review of the lease. An audit is generally ordered to verify the risk of tenant mismanagement. The team will review the lease terms, language, potential loopholes, and more to assert that the client is not being overcharged for services or rent.
Components of a Lease Audit
Components of a Lease Audit
It is common for management to make errors in data input. These may vary from mistakes in landscaping fees to wrongly-inputted utility charges. And since lease agreements tend to typically run for over 5 years, these small inconsistencies can contribute to hundreds of dollars in unfair payments.
A general lease audit consists of the following components
Contract/Lease Review
Verification of Property Space
Review of Relevant Data/Records/Accounts
Resolving Lease Discrepancies
Resolving Lease Discrepancies
If discrepancies are discovered on completing a lease audit, the concerned party can challenge the expense. For example, if a tenant finds that their insurance premiums have been over the mark, they can ask for a reimbursement. According to the law, any case of tenant mismanagement is valid for up to 4 years from the discovery of the issue.
Even if the problem does not consist of unnecessary payments, the tenants can demand alterations to the lease agreement. Upon discovering a faulty contract, amendments like the following are possible between the tenant and the real estate service provider
Alteration of lease terms, including sq. footage of the property
Resetting expenses including CAM, HVAC, utilities, landscaping, janitorial, insurance, and more.
Changing base rent
Since lease audits also review the agreement language, a review will also help produce a much more comprehensive, coherent understanding of the contract. Tenants will be able to assess whether the terms of the contract and the operating expenses are truly fair and accurate to their understanding.
Understanding Audit Right
Understanding Audit Right
However, tenants should be aware lease audits are not uniform. Though any agreement holder can demand a review of their contract, not all leases have an audit right outlined. This lease clause is an important tool as it highlights the intricacies of an audit.
A lease with an audit right included typically specifies whether a tenant will be able to demand a review. This clause will also detail the party responsible for said audit (i.e. the tenant or the real estate company). It may also contain instructions on how issues are to be resolved should they ever surface.
An agreement with an audit right included also gives the tenant the right to demand records. With this clause, they can ask the service providers to provide relevant invoices and statements relating to
Occupancy related costs
Base year calculations
Percentage rent
Annual reconciliation charges
Additionally, the tenant can also demand access to important correspondences, and even demand a property review. The latter is crucial as it is connected to the CAM reconciliation charges. For multi-tenant properties, the rent holder's common area maintenance charges are directly connected to their property sq. footage( in % to the building). Incongruencies may result in unwarranted charges amounting to hundreds of dollars yearly.
However, the right to demand this data is also within a stipulated time frame. Depending on the lease agreement, the tenant may demand these accounts only within 3 to 6 months of receiving their CAM statements. Additionally, agreements without this audit right clause can get a lease review, but the real estate company will not be required to give access to the aforementioned accounts.
Outsourcing Lease Audits
Real estate management can also sometimes demand lease audits. These reviews are generally ordered when management/building ownership changes hands or for lease renewals. A real estate company can also ask for a lease audit to
Analyze potential risk
Cut down occupancy costs
Maximize investment returns
The firm may use its in-house team or hire FAs to review the data. For extensive risk analysis, the team will have to do a deep dive into company accounting. The auditing team has to go through invoices, company statements, lease amendments, tenant correspondences, and other relevant data to optimize business operations. If necessary, physical verification of the rental space is also a part of the assessment.
The workload is higher for commercial leases - for telecom or retail properties, the rent document may cover over 150 pages. For an in-house audit team, this means weeks and even months of extensive research, analysis, and study, and even then, the final data is not always stable.
For a firm, this infers valuable labor redirection for a significant time period. The accounting team will also have to work closely with the audit team. Providing frequent invoice data, reevaluating rent alteration, or forwarding statement details is likely to interfere with their work output.
Hiring a real estate advisor/analyst can take a major workload off the company's shoulders. Getting a professional will allow the employees to focus on the core business. Additionally, the company will also be potentially bringing state-of-the-art tech into the mix.
Business analysts use lease abstraction software like MRI for risk analysis. These programs optimize output by using AI to read data. Automation can cut down on processing time, leading to faster, more accurate audits. Once fed into the system, MRI studies components like the following to draw up a relevant output.
Pro rata share
CAM charges
Tenant chargebacks
Base rent
HVAC
Insurance deposits
However, not all third-party providers are reliable. For the best output, companies should always hire verified/experienced analysts for lease audits. These professionals should be well-versed in auditing norms, law, and general real estate practices. Both analytical and interpretative skills are necessary for auditors as they have to verify huge amounts of data within a fixed period.