Leasing is one part economics, one part real estate, and one part knowing how to read the fine print. The bigger the deal, the more work there is involved in the leasing process—and the more chances there are for a tenant to be taken advantage of. It was a desire to level the playing field that led Michael Pappas, a CPA in cooperation with BDO USA, LLP, the fifth-largest accounting firm in the world, to help form the firm’s first corporate real estate services department in 1993. He is now the senior managing director of the department (he’s been with the firm since 1986), leading a team whose primary task is data analysis and triage.
According to Pappas, “There are many components to a lease—your base rent, operating expenses, real estate taxes, utilities, cleaning, and other sundry charges—and there is some leeway and subjectivity with how some of these charges are determined and calculated.” For smaller properties and leases for small-business owners, discrepancies in these charges can be minor. But for some clients, who are presented with hundreds of pages of lease language, having a lease audited is not just prudent but almost necessary. Pappas says this can add up to more than a million dollars of savings annually, a substantial amount that’s compounded by the length of the lease, which can sometimes be as many as 10–15 years.
While it’s rare for landlords to intentionally try to exploit leases in their favor, there are some issues that arise often in negotiations. “One of the significant areas that is always a challenge is the billing of utility charges back to the tenant,” Pappas says. “Unlike many other expenses, utility charges come into the building through one source—the public utility—and that needs to be allocated and billed separately.” The most common methods for charging a tenant for electric usage are through rent inclusion, submetering, or direct metering. The charges are further complicated by how electricity is shared in a building’s common spaces and systems. Again, in a small office space, these kinds of charges might be inconsequential, but for a tenant renting multiple floors or a whole structure, attention to such minute details can mean huge savings.
“Having a lease audited is advantageous at any time during a tenancy,” Pappas says. “For those tenants with a gross lease, the initial year, or ‘base year,’ is especially important.” Costs incurred during a tenant’s base year provide the measure against which all future years’ increases will be determined. If there is an error in the base year, that mistake will carry on throughout the term of the lease.
Auditing the lease even after the base year, however, is still important because usages and policies tend to evolve over the life of a lease. “What we’re looking for is a consistency in the billing methodology over the course of the lease term because you don’t want a lot of fluctuations in the costs that are being incurred,” Pappas says.
By finding such consistency, BDO’s corporate real estate team not only makes money; it helps other save it. “I think it’s always critical that tenants are protected,” Pappas says. “Tenants aren’t always overcharged, but they need to get the benefit of their bargain.”
