Every year, commercial tenants sign off on operating-expense reconciliations they've never really scrutinized—and landlords know it.
"Sometimes the landlord makes mistakes, or they are aware and bill in error, hoping the tenant does not catch the mistake and pays," says Eric Dripchak , general manager of insightsoftware, a provider of lease administration and the most comprehensive provider of solutions for the Office of the CFO.
Dripchak has extensive experience identifying these types of errors, which he notes tend to cluster in several key areas. Vigilance, he says, is a tenant's best defense.
Double-dipping, fine print and hidden fees
Management fees are fertile ground for overbilling, Dripchak notes. The fee is typically charged as a percentage of gross rents, meant to cover the cost of running the building. Leases rarely specify whether "gross rents" means rents actually collected or rents theoretically charged.
"Landlords will state a percentage of gross rents received, but they will rarely provide backup to show what they have received in rents," he says. Without documentation, tenants have no way to verify whether the fee has been calculated correctly. Lease language should specify "gross rents paid by tenant" to close the loophole.
Tenants should also watch for layered charges. "If there is a management fee, there shouldn't be an additional administration fee billed as well," Dripchak says. "This is double dipping."
The same vagueness allows other costs to slip through. Structural repairs like those to roofs, parking lots, exterior walls and foundations are typically the landlord's responsibility. But when lease language doesn't spell that out explicitly, landlords have room for creative interpretation. The lease should clearly state which repairs are the landlord's sole responsibility and not subject to tenant reimbursement. Without that, a roof replacement can easily become a line item on the next reconciliation.
The gross-up trap
Gross-up provisions are meant to fairly allocate costs in a partially occupied building, but in practice they're a common source of error. The core mistake is applying gross-up logic to expenses that shouldn't qualify.
"Only variable costs—utilities, janitorial, etc.—should be grossed up," Dripchak notes. "Real estate taxes and insurance should not, since the costs are based on the building and not occupancy."
It's possible to challenge these costs, but tenants must act quickly. Most leases include an audit clause that limits the dispute window. Missing it can make even a clear overcharge unrecoverable.
The base-year blind spot
Dripchak points to base-year manipulation as one of the most difficult errors to detect. A newly constructed building often carries first-year real estate taxes assessed on unimproved land. But once a building goes up, taxes increase significantly to reflect those improvements. If that artificially low figure anchors the base year, tenants are forced to absorb steep tax increases for years without any corresponding change in building operations.
Tenants must stop taking reconciliations at face value, Dripchak says. Desktop audits on every invoice and reconciliation can surface problems before they compound. insightsoftware's lease administration platform is built on that principle. It allows tenants and their advisors to systematically verify every charge before errors have a chance to grow across the life of a long-term lease.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.