We often discuss how important it is to review your Common Area Maintenance (CAM) or Operating Expense (OPEX) reconciliation since reviewing this information can save your company money. Depending on the size of your leased space, it could be a great deal of money. Knowing your audit rights and how much time you have to review your CAM/OPEX reconciliation is important as a missed date can prohibit an audit, exempting a landlord from refunding dollars owed to your company. You might also wonder whether a desktop or full audit is most appropriate for your situation. In this article, we will explain these topics to provide a better understanding for your reconciliation review.
When you review your CAM/OPEX reconciliation, the first step is to read the section of your lease containing your audit rights. A few things you might find in your audit clause are: the amount of time you have to give notice of your intent to audit, who the auditor has to be (e.g., a CPA, someone from within your company, or if anyone can complete the audit), the amount of time you must allow the landlord to prepare for an audit, who has to pay for the audit, and how the auditor may be paid. So, what do you do if your lease does not have an audit clause? This actually gives you, as the tenant, full rights to audit multiple years and have whomever you would like complete the audit of the landlord’s books.
Auditing your CAM/OPEX reconciliations begins with a desktop audit, which can be completed without giving notice to your landlord. A desktop audit compares the current year’s expenses to the prior year’s expenses, identifying any increases or decreases. It also validates information on the reconciliation back to your lease, including pro rata share, which expense categories may be variable, if there are any caps on increases, and if management fees and/or administrative fees are allowed. Requesting copies of all real estate tax and insurance bills from the landlord is also helpful for your review to ensure the correct amounts have been billed and no late payment penalties have been included.
Once you have verified the information from the lease, you might also complete a year-over-year comparison of the CAM/OPEX expenses. Comparing the expenses by category will help to identify where increases and decreases occur throughout the expense categories. If one category increased by 10% while another category decreased by the same amount, you might want to ask the landlord for additional detail for these specific areas. Over the years, you will be able to see trends in the CAM/OPEX expenses and you will gain additional knowledge of how your landlord calculates these expenses. Once you have completed the year-over-year comparison and verified all other lease information, you will want to determine whether or not you need to move forward to a full audit or if you are satisfied with the reconciliation and want to consider it complete.
Full Lease Audit
Sometimes, when your landlord is not forthcoming with information, if errors are found during the desktop audit, or if you have additional unanswered questions, a full lease audit might be needed. A full audit can be very time consuming and may require more than one person to complete if the time frame stated in the audit clause of the lease is short. Should you determine a full audit is necessary, there are several steps you will want to take.
Landlord’s Office Visit
You will need to notify your landlord of the impending audit and agree upon a date to visit the landlord’s office. If you are not in the same town or state as the landlord, you will need to prepare travel arrangements to meet with the landlord at their office.
Whenever possible, request information from your landlord in advance of the audit, such as a copy of the General Ledger, gross up calculations, occupancy schedules, and other CAM adjustments. This can help you efficiently move the audit along by being prepared with questions regarding particular invoices before you arrive at the landlord’s office. It can also be helpful to provide the landlord a list of the information, including specific invoices or contracts, to have available for review during your visit.
You will want to visually inspect the property and take a tour of the building once you arrive. You might also speak with the tenant’s onsite office manager to discuss what has occurred in the building during the audit period. This helps you identify any significant changes that have occurred, e.g., a new lobby renovation, the expenses for which may or may not be included in CAM per the lease. In addition, if you are aware certain improvements have occurred at the property, such as significant parking lot work, you will want to see the parking lot is in excellent condition. The inspection connects the work that has been done at the property with amounts included in your expenses and the invoices you review while completing the audit.
Review of Accounting Records
Reviewing the landlord’s accounting records as well as invoices will take up the bulk of time during the audit. Making sure the invoices have been charged to the correct accounts as well as making sure any possible capital repairs follow the terms of the lease will be a main focus. Additionally, ensuring that all expenses are fully supported by invoices, contracts, payroll records, and other documentation contributes to the validity of the reconciliation statement. Following the terms of the lease for all inclusions and exclusions is also important as you will want to be sure only those items that should be part of the CAM/OPEX reconciliation are included.
Recalculation and Report
When the field work has been completed, recalculating the CAM/OPEX reconciliation and creating a final report of the audit findings is the final step. Completing this will require all requested changes follow GAAP (Generally Accepted Accounting Principles) and the lease language. This report must be accurate and clear as to leave no doubt about the request, and all findings should be supported by language in the lease. Should the landlord agree with the findings, the reconciliation calculation will be adjusted and the savings will be credited to the tenant’s account.
Reviewing your CAM/OPEX reconciliations is an annual process that allows you to make sure your expenses are in line with expectations, and that you aren’t paying more than your obligations. Understanding your audit rights as well as what should be included in a desktop audit and full audit of the landlord’s books will help with your audit process. Conducting a lease audit takes effort, but in the long run, it is a good business practice which can result in significant hidden savings.
Scribcor has an experienced team of lease auditors ready to help you with your next audit. Whether you need a desktop audit or a more complex on-site audit, our team possess the skillset required to validate your billing against your lease and related documents. We can help you manage your CAM/OPEX reconciliations to help you identify any errors, misstatements, or overcharges, and send savings directly to your company’s bottom line. Find out how by contacting us today!