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Lease Audits: Delivering Value

The following table summarizes recent credit recoveries that Deloitte has assisted in securing for other lease audit clients. Each lease audit was successfully completed through hard negotiations, timely participation by our clients, and from leveraging lease opportunities.

Client industry Location size (sf) Approximate recovery amount   Description of issue
Securities 150,000 $2,500,000 Operating expense allocation errors
Financial services 300,000 $1,000,000 Management fee miscalculation, chilled water billing error, and Heating, Venting and Air Conditioning (HVAC) overcharges
CPA Firm 121,000 $650,000 Unpaid tenant improvement allowance, capital expenditure inclusions, and overhead inclusions
Financial services 265,000 $550,000 Gross-up miscalculations, vacant space electric inclusions, and corporate overhead inclusion
Financial services 135,000 $525,000 Gross-up miscalculations, above-market related party services, and capital expenditure inclusions
Financial services 161,000 $450,000 Gross-up miscalculations and overcharged security
Education 100,000 $450,000 Operating expense allocations, rent commencement misinterpretations, base rent CPI miscalculations
Financial services 238,000 $350,000 Unapplied tax appeal refund and math error
Insurance 100,000 $80,000 Special cleaning exclusion
Consumer products 125,000 $65,000 Missed operating expense cap

Examples of errors found
In our experience, there are two types of errors, which are uncovered during the lease audit process: intentional and unintentional. Intentional errors are purposeful deviations from the appropriate application. Unintentional errors include human and oversight errors and are primarily mistakes caused by misinterpretations, misjudgment, and/or carelessness. With the prospect of these errors within your lease charges, there is often more than enough of a reason to have a lease audit performed.

The following is a listing of the errors we most frequently observe during a lease audit process, many of which could be intentional or unintentional.

Operating expense errors

  • Inclusions of commonly excluded expenses, such as corporate overhead, leasing expenses and ground lease payments
  • Capital expenditure inclusions and misapplication of capital amortization periods
  • Gross-up miscalculations, specifically with math errors, occupancy calculations and landlord’s allocations of fixed versus variable expenses
  • Proportionate share miscalculations or expanding building sizes related to measurement standards
  • Above market related party overcharges
  • Management fee miscalculations and overcharges
  • Improper inclusions of expenses directly reimbursed by tenants
  • Improper capital expenditure inclusions and misapplication of capital amortization periods
  • Misallocations of shared expenses
  • Miscalculation of expense caps
  • The restricted application of profit components on expenses
  • Base year misapplication and/or calculations
  • The inclusion of the cost of utilities for vacant spaces
  • Missed indirect expense allocations - mainly to parking garages or other profit centers of a building
  • Improper inclusions of reserves

Real estate taxes

  • Missed indirect real estate tax expense allocations - mainly to parking garages or other profit centers of a building
  • Improper inclusion of personal property or income taxes
  • Failure to return tax refunds
  • Base year errors, typically on new buildings where taxes were not fully assessed in the base year
  • Proportionate share miscalculations

Above standard service and utility charges

  • The application of profit components when services are to be at landlord “cost”
  • Incorrect calculations of the cost of services
  • Incorrect or miscalculated rate applications
  • Miscalculation of meter multipliers related primarily to electricity
  • Above market related-party overcharges

As used in this document, ‘Deloitte’ means Deloitte LLP (and its subsidiaries). Please see  www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

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