When it comes to managing commercial properties, conducting a comprehensive lease audit is essential for success. Whether you are a small real estate firm or an expansive property management company, thorough and accurate audits can help you identify potential issues that could affect the profitability of your business. Commercial lease audits provide real estate companies with the opportunity to maximize their revenue and ensure compliance with industry regulations.
What happens in a typical lease audit?
During a lease audit, it is essential to find out which platform or lease management software/Excel template was used for abstracting the leases. It is also vital to ensure that all the necessary lease documents, amendments, addendums, letter of correspondence, and renewal agreements are in place.
What are the various facets of a commercial lease? And what gets reviewed during the lease audit?
A commercial lease audit involves reviewing the following elements:
- Property and lease Info
- Landlord and tenant info
- Key dates and lease term
- Base rent calculations and rent increase dates
- Space measurement
- Proportionate share percentage of CAM and other NNN charges
- Base year
- Cap on CAM, HVAC, and utility payments
- Other occupancy costs and tenant chargebacks
- Forbidden lease expenses and capital expenditure
When do you need a lease audit?
Although it is mandatory to conduct lease audits regularly every year, certain events like Changes in ownership of the building or the rented space, Changes in Lease management software/platform, Acquisition/Merger of properties, Changes in charges compared to the previous year, Post any force majeure event (Like Pandemic, an act of God) may trigger the need for additional lease audits. In addition, lease renewal or termination may also necessitate an audit.
This blog will discuss the five ways to conduct lease audits efficiently:
Review the lease agreement: The lease agreement is the principal governing document that lays out the terms and conditions of the lease, which includes the rental amount, payment schedules, renewal options, and responsibilities of both tenants and landlords. Therefore, during the lease audit, it is imperative to verify that all lease terms are being met and that they are devoid of any discrepancies. Also, it helps to verify the documentation and rental payments to ensure that all the parties fulfill their obligations under the lease agreement.
Verifying rent payments: Review the lease agreements to determine the amount of rent due, payment due dates, and any late payment penalties. In addition, the auditor must go through the rent payment records and tenant receipts to ensure that the rent has been paid on time and accurately. In case of any variation in the charges, the auditor will investigate and resolve it with the property owner and the tenant. This process helps ensure the tenant is either overpaying or underpaying the charges.
Check for proper insurance coverage: To check if the insurance requirements are being met according to the agreement, the auditor may examine if the tenant’s insurance coverage is in place and meets the minimum standards. It also involves checking the insurance policy limits, type of coverage, and exclusions. If the tenant still needs to maintain the insurance, it has to be brought to the property owner’s attention and fix it to ensure the lease terms are followed.
Examine CAM charges: Apart from the rental fee, an additional fee is collected towards the maintenance of the shared area as common area maintenance (CAM) charges. It must be reviewed to make sure that the tenants only pay the actual costs for CAM, as mentioned in the lease agreement. It is a significant step of the audit to ensure that the tenant is not overpaying the charges. If it is the case that the landlord is overcharging them, it has to be resolved.
Track expenses and operating costs: It involves verifying if the landlord has accurately calculated and billed the operational fees, which include utilities, property taxes, and other charges. Keeping track of all the expenses and operating costs helps to ensure it is in line with the agreement and budget. It also helps to eliminate the areas of inefficiency and overspending.
A lease audit report is prepared based on the review of all aspects of the lease agreement. Lease audits help real estate firms achieve a high-performing portfolio while saving money and time.
Should you hire a professional lease auditor?
Hiring a professional lease-auditing firm is a great way to ensure accuracy and compliance when conducting commercial lease audits. An experienced firm will have the knowledge and expertise to analyze leases accurately, identify potential risks or issues, and develop appropriate solutions. In addition, they can evaluate market trends, identify cost-saving opportunities, review contractual language for possible disputes, and tailor recommendations for maximum savings.
PreludeSys has a team of leasing experts with extensive knowledge of auditing commercial leases. We closely work with businesses to understand their unique requirements and deliver timely audits that help them to maximize savings while ensuring compliance with applicable regulations. Contact us today to benefit from our tailored and cost-effective lease audit services.