A Simple Audit- What Does a Base Year Tell You?
It’s been almost a year since our we wrote about Building Operating Expenses often referred to as “CAM” charges. The question we posed was, “Is it worthwhile to perform a full audit on your CAM charges?”
In short, unless you have a rather large space with CAM’s exceeding $50,000 it probably is not something a lease audit specialist might take on. Typically, contingency audit firms receive as a fee, 50% of their recovery. If you have a small space and your CAM’s run less than $10,000/year, it is likely not economically feasible for the audit firm.
However, here are a few tips you may want to consider. In that previous BLOG we provided a simple chart that we utilize to track our clients’ CAM’s from year to year. The most critical item on that chart is the actual charges made by your Landlord in your Base Year.
The Base Year calculations sets the table for subsequent year charges. The Landlord should provide a line item statement showing the following:
Breakdown costs of both major and sub-categories
Size of the building
The percentage of the building you occupy
Notation showing if the costs have been extrapolated to show full (95%) occupancy in the building had it been fully occupied during that year. Often referred to as “gross up.”
In a recent review of a new client’s statement, the Landlord failed to provide the line items accounting for the Base Year. Their rationale was since the Tenant had no charges during that year there was nothing to review other than the total amount to which future years would be compared. When that report was provided, we observed the size of the Building somehow varied from year to year which changed the Tenant’s percentage of the Building year to year and was contrary to the Lease.
Secondly, we found the Landlord failed to extrapolate the costs to 95% as per the Lease which meant the Base Year would be lower than it should be resulting in a greater delta in subsequent years. As a simple example:
Section A shows the total building CAM’s is calculated to 85% in 2012 compared to what it should be if calculated to 95%. In 2013, the CAM’s were correctly adjusted to 95%.
Section B shows the tenant’s percentage of the delta based on an incorrect 85% calculation where the tenant is charged $2,027.44.
Section C shows the delta between the correct 2013 cost verse the correctly adjusted 2012 charges. The Tenant’s actual CAM charges would be $384.36.
As we compared the Base Year to other years we found items not included in the Base Year were added in subsequent years. This meant the total costs in those later years would be artificially inflated thus creating an even a greater delta between the Base Year and the following lease years. What the Landlord should have done would have been to insert that additional charge or service into the Base Year to balance the costs or not add that cost into the future years per BOMA standards.
In fact, with this particular set of CAM’s we hit the mother load in that each of the bullet points noted above came into play on this one CAM review.
Also, as mentioned, the small tenant can not afford the luxury of a full audit. The example above showed a $1,643.08 error in one year alone. The Tenant occupies about 3,200 RSF which means the Landlord, in theory, overcharged this tenant about $.04/SF. Considering the Building is about 280,000 RSF, if all tenants are overcharged this same amount, the Landlord benefits from about $143,769.50 per year.
In most all cases the error are not intentional but simply clerical or a mistake is made in addition. Too often, because the accounting people are preparing so many statements and they have their model to follow, they simply plug in numbers and do not recognize the various idiosyncrasies of each lease.
While you may not find errors all the time, be sure that you:
1) Get the line item statements for your Base Year
2) Check the items noted above
3) Recalculate all the math
4) Be sure what is included in the base year is consistent throughout the
Term
The time you or your real estate advisor spend on this could save you a great deal.
