When most people think of an auditor they envision a man wearing a green eyeshade hunched over a multitude of ledger books with one hand on the adding machine. Rarely does the vision include a skilled negotiator sitting around the table with the landlord trying to work out the best possible solution for all parties.

Negotiation skills are every bit as important to the lease audit process as good accounting techniques and a thorough knowledge of the commercial real estate industry. After all, what is accomplished if noncompliance issues with the lease terms are identified but the associated dollars are not recovered? A successful negotiation results in commitments that satisfy each party’s interests while maintaining a working relationship among the parties.

The key to building relationships through negotiations is to be “tough on the issues, not on the person.” Whether you negotiate with superiors, subordinates, salespeople, your spouse or children (the world’s toughest negotiators), the process involves efficient communication techniques.

Strong emotions often impede effective communication, as most people have learned through trial and error. The best policy is to leave your emotions at the door. Do not bring them to the negotiating table. Instead, bring a solid understanding of the issues to the table and know your BATNA (Best Alternative To a Negotiated Agreement). Emotions, pride and ego all get in the way of digging underneath the other parties’ stated position. You need to learn the other parties’ interests: what they really want to achieve. Once all parties have explored and revealed their underlying concerns, it is time to brainstorm.

Brainstorming is a non-committal method of exploring options to maximize potential gains. Some ideas may turn out to be impractical while others will encourage further exploration. It is in this manner that the overall “pie” can be expanded, instead of simply divided among the participants. This process fosters effective communication from which creative solutions emanate. From this point, attempts to resolve issues may need to be legitimized by referring to industry operating procedures, market standards or outside third-party opinions. Before committing to a proposed resolution to the issues, always compare it to your BATNA. If the proposed resolution is better than your Best Alternative to a Negotiated Agreement, commit to the resolution; if your BATNA is better than the proposed settlement, be prepared to walk away from the table and exercise your options.

The goal at the end of the negotiation session is to emerge with a fair and equitable solution for all parties while maintaining a working relationship among the tenant, landlord and auditor.

It is this skill and professionalism that Chelepis & Associates, Inc. can bring to the negotiating table to resolve lease audit issues on your behalf.

Resource: Getting to Yes: Negotiating Agreement Without Giving In - by Roger Fisher, et al

What if you threw a party and everyone came? What if you then charged everyone for the cost of that party as well as the cost of the gifts that you gave the attendees? Well, this is exactly what happens when your landlord charges the cost of Tenant Relations through to you in the common area maintenance pool.

Even though many leases have a prohibition against charging “promotional and advertising” costs through to tenants, the landlords attempt to pass through these costs by classifying them as standard costs for a “Class A Building.”

So what can you do? Many times, these costs are buried under “Administrative Costs.” You may not even know that they are there. If you are currently negotiating your lease, simply define these costs as “prohibited operating expenses.” If you are already locked into a lease, an audit will locate and bring these costs to light. Should you decide against a full audit, require the landlord to fully itemize the costs included under these broadly defined terms such as “Administration Costs” and “Repairs and Maintenance.” This information can usually be located in the annual detailed general ledger maintained by the landlord’s accountant.

In the end it pays to know where your money goes.

You’ve moved into an upscale office park with all of the perks and amenities that a successful business should enjoy. When your first electricity invoice from the landlord arrives, the amount is higher than you expected. Maybe the local utility’s per kilowatt-hour rate was higher than you projected, maybe the office equipment consumed more electricity than anticipated or maybe the electrical meter is measuring usage on circuits that are not part of your premises.

Has your facility manager ever traced the circuits backwards from the meters or sub meters to the electrical panels, then to the premises, to determine exactly what electrical consumption is being measured? Sometimes even reputable landlords cannot accurately determine what each meter or submeter is measuring until a walk-through inspection is performed.

Chelepis & Associates recently conducted an audit of electricity usage for one of our clients. We discovered that the common area parking lot lighting for a portion of the campus complex was attached to the tenant premises meter. When we conducted a walk through inspection, however, not only were they being charged for the parking lot lights, the electricity for the cafeteria refrigerators and cooking equipment were also attached to their meters, as was the security lighting! This review resulted in a $700,000 cost recovery for this tenant.

If your metered or submetered electricity appears too high, call us to examine your utility usage and consider a walkthrough inspection of the circuitry.

Consumer Price Index rent adjustments are simple to calculate, right? Divide the current index figure by the base index figure to find the percentage increase in CPI, then multiply that percentage by the rent to arrive at the adjusted rent. What could be difficult about this?

You probably know that there is an index - The National CPI (All Items) that is published monthly. It is a broad-based index encompassing the cost of living for approximately 87% of the United States metropolitan population. You are probably aware of the narrower CPI-W (All Items) index that encompasses the cost of living for approximately 32% of the metropolitan population. Did you also know there are CPI-U and CPI-W indices for four regions and 27 major metropolitan areas, some of which are only published semiannually or bimonthly? On top of these confusing choices, add seasonally adjusted indices, old series and new series indices and market indices (food, medical costs, housing and transportation). Not quite so simple now, but the lease language should specify the applicable CPI index.

The CPI clause in the lease should specify, at a minimum, a detailed description of the applicable CPI index, the exact date when the first rent adjustment should occur and the frequency of subsequent adjustments, the publication date of the base CPI index and whether the base date changes in subsequent adjustment periods. With this information in hand, the CPI adjustment may be calculated as described above. But it can become more complicated!

Often, there is either a floor (minimum) or ceiling (maximum) cap or both, on the amount of the adjustment. Should the percentage increase in CPI fall between these two figures, the actual CPI percentage increase is used to adjust the rent. If the CPI falls outside the prescribed range, either the floor or ceiling percentage is used for the adjustment.

Many rent adjustments occur annually, on each anniversary of the commencement date. Occasionally, an adjustment will occur only every other year or on the renewal dates. In these cases, it is important to be cognizant of the dates of the base index and adjustment index, as misinterpretation of either of these numbers will yield an incorrect adjustment. Another common error occurs when the base index is established at a fixed date (commencement) over the life of the lease, but the adjustment index advances from year to year. The increase in the CPI index should be applied to the initial rent, not the adjusted rent. In this case, the compounding effect of annual CPI increases multiplied by the most recently adjusted rent is erased. Another dilemma in the calculation of CPI adjustments occurs when the specified index is not published on the prescribed adjustment date. To avoid this problem, lease language may be added to the index date that says, “or the next date for which the index is published.” We have been involved in cases where this “compounding” effect results in hundreds of thousands of dollars in increased rent as a result of a small CPI error.

Please help your future lease administrator avoid the above situations and attempt to perform the CPI adjustment calculation as written in the lease before signing the document. Consider putting an example of this calculation in the lease; it’s a good practice.