Navigating Legal Issues in Lease Audit Claims Presented by: Marc E. Betesh, Esq., MCR.h, KBA Lease Services/ Visual Lease Maria Pizza, Terrie O'Connor Realtors – The Mcbride Group

Overview How do lease audits fit within the “law?” Dispute resolution CAM provisions as contract issues Dispute resolution Negotiation Litigation ADR in the lease ADR not in the lease

Specific Issues Management fees and administrative charges Capital Expenditures Space measurement Gross-ups HVAC Overtime and other special charges Parking garage charges

Management Fees / Administrative Charges Normal operating costs typically included in CAM Center/building management a normal operating cost Administrative charges are to cover costs of administration, and are normal operating cost Management fee can be additive – can double count for labor What does Lease say? Does it allow both charges?

Management Fees / Administrative Charges Audit Issues Duplicate charge for same labor Rates / fees above market Rates / fees inconsistent (for Base Year leases)

Capital Expenditures CapEx typically excluded from CAM / Operating Expenses Common allowance for CapEx if Required by laws, insurance, safety Cost-savings Allowable CapEx must be amortized

Capital Expenditures Audit Issues Expense vs. CapEx Laws/insurance/safety requirements predate the lease Don’t actually save money Amortization schedule not correct

Space Measurement Rent typically determined as cost/SF x RSF Cost/SF driven by market Cost/SF, RSF and sometimes total Base Rent are often fixed in lease to avoid ambiguity No standard of measurement PRS often a formula, but can be stated as well

Space Measurement Audit Issues Size smaller than expected PRS no longer valid due to changes in configuration Added RSF Change from single floor to multiple floor

Gross-Ups Removes dilution of costs due to Low occupancy Partial use Partial cost Goal is to cause tenant to pay 100% of costs attributable to it Numerous formulas to achieve Fixed vs. variable expenses Formulaic vs. practical approaches

Gross-Up Audit Issues Failure to separate fixed from variable expenses Failure to address non-occupancy related items Disproportionate usage

Parking Garage Charges Parking area costs usually part of CAM / Operating Expenses Free parking (no charge to vehicles) is a normal amenity Paid parking changes the amenity to a business Costs to maintain paid parking areas should be excluded from CAM

Parking Garage Audit Issues Charging expenses for paid parking to CAM Failure to apportion expenses between paid / unpaid parking cost pools Taxes Utilities Insurance Labor Security

HVAC Overtime and Other Special Charges Special services charged to the tenants requesting them OTHVAC Elevators Special / Supplemental Cleaning Need separate agreements for these services Some with landlord (built into lease) Some with outside vendors Must exclude from CAM / Operating Expenses the costs to provide these services

HVAC Overtime / Other Special Charge Audit Issues Cost to provide services not excluded from CAM / Operating Expenses Lack of separation of standard and extra services in multitenant properties Excessive charges for these services

Conclusion

Questions and Answers