Laiya SmithWhy Should my Real Estate Portfolio be Audited?
Updated: Sep 12, 2019
By Janet Forrest, MBA
Senior Auditor, Account Manager
If your real estate portfolio lacks a systematic approach to auditing your landlord’s statements, you are essentially handing your landlord a blank check and allowing him to fill in the amount. Is this analogy a bit extreme? Maybe, but we don’t think it’s an exaggeration. Occupancy costs are a significant component of the cost of doing business, and businesses cannot afford to hand their landlord a blank check anymore than they would fail to validate invoices received from suppliers of raw materials.
Your real estate broker has diligently negotiated favorable lease terms on your behalf but ensuring compliance with the lease provisions is not the broker’s responsibility. Enforcement of the negotiated lease provisions is the duty of the tenant. Lease audits are an effective method of ensuring that the landlord complies with the negotiated terms of the lease.
The term “audit” is defined as, “a formal examination of an organization’s or individual’s accounts or financial situation,” and often conjures up visions of accountants hunched over stacks of ledgers, culminating in a (hopefully) unqualified opinion that the organization’s financial statements are presented in accordance with generally accepted accounting principles.
On the other hand, a lease audit is, “an examination of a landlord’s books and records to ensure compliance with the economic terms of the lease.” The product of a lease audit is not an opinion based upon the fairness of the landlord’s financial records, but a report identifying discrepancies between the financial terms negotiated in the lease and the occupancy costs billed by the landlord.
In our experience, errors are not as blatant or visible as they might have been in the the past, thanks in part to: 1) greater scrutiny by lease auditors and 2) property management-specific software such as Yardi and Kardin. Instead, potential errors in billing statements are well-hidden and more difficult to identify without a thorough investigation. Could you identify utility bills for one of your landlord’s other properties in your operating expense statement? It’s nearly impossible without executing a lease audit. If it's there, we have the experience to find it.
Under the scrutiny of an audit, it has been our experience that annual operating expenses are billed incorrectly approximately 80% to 90% of the time. No business can afford to overpay for occupancy costs, nor should you trust your landlord - no matter how good their intentions are - to be immune from mathematical or careless mistakes. If you are ready to see Measurable Results from a lease auditor, call us to discuss a lease audit program designed to fit your needs.
Chelepis exists for one reason: to improve your bottom line. We accomplish this through the successful implementation of our audit programs, consultations, classes and our keen ability to successfully negotiate settlement terms on behalf of our clients. After $250 million in recoveries, our results speak for themselves.
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