LEASE AUDITING CASE STUDY 1

Restoring Compliance To Tax And Operating Expense Cap Saves Tenant $109,000

Client
Law Firm that leased 35,000 square feet in Chicago, IL

Audit Discovery
The lease provided that real estate taxes for first two lease years were not to exceed a particular dollar value. The operating expenses were to be capped at 5% cumulative increase per year after the second year. The landlord did not account for the limit on taxes nor did they calculate the pass-through expenses utilizing the 5% cap. The accounting was further complicated since the lease provided specific language for lease years, different from a calendar year. CPI adjustment language was violated too since the landlord was using different Consumer Price Index (CPI) and different methodology than the one stipulated in the lease.

Resolution
MBG Consulting adjusted the tax expenses since lease inception to reflect the capped amount for first two lease years and capped increase in operating expenses after the second lease year. The CPI adjustment was corrected as well and a new calculation standard was set, thus assisting the landlord in future calculations and providing our client with a specific tool to monitor billing accuracy.

Lessons

• Straightforward calculations may be principally wrong (CPI, Lease Year)
• Caps and dollar limitations on increases may not be imbedded in the landlord's calculation formula, especially when the concession is tenant-specific.