The Audit Storm: Tenants and Expense Reconciliations

October 10, 2024

Author: Rhonda Scholz, Director of Lease Administration | Audit Specialist

Over the last couple of years, tenant audits have increased exponentially.  Audits are no longer limited to large corporations and national retail chains; rather, even the smallest tenants and the 'mom and pop's' are now auditing with many hiring their own in-house 'lease analysts,' while outsourcing to larger auditing firms has continued to grow in frequency.  Tenant reviews and audits have become the 'norm'.  A typical audit review requires the Landlord provide property tax invoices and payment receipts, insurance premium billings disclosing coverages and costs along with policy declarations pages and proof of payment, plus a detailed general ledger showing all applicable expenses, and a copy of each invoice listed on the general ledger.  Businesses have formulated their own spreadsheets to analyze Landlord's expense billings, and the burden of proof is placed on the Landlord to substantiate any questioned expenditure that the tenant believes may not be applicable according to their lease language.  Tenants protest individual line items on a single invoice and exclude the entire invoice amount until Landlord can prove the expense item is applicable.  Square footages are scrutinized as they affect the tenant's pro rata share, so tenant rosters or rent rolls are often requested along with parcel maps and accompanying property schematics.  Expense caps are dissected based on lease definitions of common area costs and controllable and uncontrollable expenses.  

Given the amount of detail involved, a typical audit can last from two to three months up to a year or more.  A high rate of turnover within tenants' audit departments has notably created additional delays while 'green' staff come in blind and struggle with the complexity of the details and history.  While in flux, disputed amounts are often withheld by tenants, although property taxes are generally submitted within the lease timeframe parameters.  Occasionally, the lease language must be cited by landlord to move the needle by noticing tenants of the timelines for payment along with any limits defined for the allowed audit period within their lease.  Last resorts include default remedies although every effort is exercised to try and avoid the hard line and hopefully maintain a cordial and long-term relationship.  The newest trend taking shape over the past year is a questionnaire created by the tenant that the Landlord is asked to complete.  Landlord submits only items requested that are provided for in the lease or reasonably necessary to substantiate costs.  New and creative ways to challenge landlord's expenses are never-ending in the ever-evolving audit world.  Rising inflation in a troubled economy and the increasing costs of doing business has launched the audit storm.  Companies have learned that looking closely at their leases and landlord's expense billings may afford them a reduction in their share.  And after all, even if they find just a speck of money, by watching their pennies, their dollars take care of themselves.