Leases are generally negotiated by one team then passed onto accounting or operations to implement. Key negotiated points are missed in this transition, because there’s often a lack of knowledge and understanding of lease-specific language in the following lease clauses:
- Commencement dates
- Base rents
- Recoverable expenses
- Tenant improvement allowances
- Free rent
This initial transition of a new lease often creates gaps in lease obligation implementation, which can often be identified by a lease audit.
Implementation gaps of this nature when not audited often grow as subsequent teams continue to implement with unclear expectations.
This scenario often creates a wide variety of different lease audit findings. The following issues are common results of lease implementation discrepancies:
- Unallowed ownership expenses
- Incorrectly applied expenditures
- Gross-up errors
- Improper non-office-area expenses
Ownership expenses are generally not allowed as recoverable expenses. However, owner accounting or lease administration often doesn’t separate these expenses from allowed recoverable expenses.
For example, an expense like personnel recovery for staff that doesn’t have direct responsibility for the property would be an ownership expense.
Other examples of ownership expenses include the following:
- Property management
- Janitorial staff
- Ground lease rent
- Interest payments
- Marketing costs
- Insurance deductibles
The following are some common incorrectly applied expenditures often used in expense recovery billings.
- Property tax bills
- Base year expense caps
- Net, net, net (NNN), or taxes, insurance, and common area expense, recovery
- Capital expense amortization
- Parking expenses
Depending on the state, the last sale of the property and the ongoing property management valuations, property taxes can introduce expense billing complications. Owners can have errors within their capital improvement amortization due to not making allowances for different lease language.
Because every lease is different, owner lease administration and accounting teams struggle to identify the variances between leases and open themselves up to mistakes.
To avoid further errors, gross-up calculations require lease administrators and accounting teams to have experience with the formulas to perform the calculations correctly.
A common error is when a multitenant property with many different leases has different gross-up language for each lease. A team that doesn’t know how to properly account for this issue could introduce errors.
Non-Office Area Expenses
A good example of non-office area expenses could be when an owner focuses on delivering amenity spaces for all tenants on the property. These fitness, bike storage, and conference areas provide great amenity spaces for tenants but are also subject to lease language. In most cases, the amenity areas are repurposed leased space in a property. Although the expense may be allowed, your lease will govern how and when these amenity spaces become a recoverable expense and should be well defined and reported.