Saving Money - Why Municipalities Should Explore Effective Lease Auditing

Real Estate | Corporate Finance & Restructuring | American City & County (Reprint)

May 7, 2014

In the current economic environment, with funding limitations and strains on resources, a thorough lease review by municipalities will ensure that they are not being overcharged due to errors and incorrect calculations. With the potential to save millions of dollars in erroneous overpayments over the lease term, every effort should be made to conduct comprehensive lease reviews. With rent and additional rent among the largest expense items a municipality has, this practice is critically important to the municipality’s financial health.

In most cases, the operating expense provisions of a lease have been meticulously negotiated by sophisticated attorneys both on the landlord and tenant side. Properly implementing these provisions is complex and unfortunately, they are not always interpreted correctly by lease administrators, which can ultimately cost the tenant a lot of money. These misinterpretations (and subsequent incorrect implementations) in these negotiated documents will be discovered during a lease audit. Depending on the number of leases a municipality has in its portfolio, it is important to prioritize which ones will be audited first and then identify the greatest opportunity for cost recovery.

Criteria to consider when reviewing the municipality’s portfolio include the cost-per-square- foot, significant fluctuations in operating costs, and whether the leases are managed by a particular landlord. This last point is important because often, when landlords have many leases with a particular tenant, it is not unusual to see similar billing errors across all properties. Therefore, a rigorous lease audit could provide the tenant with a great opportunity for savings and cost recovery.

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