Last year, we observed several key changes to the marathon that is Operating Expense season. These changes present challenges that require strategies to stay on top of this key component of Total Occupancy Cost. Our team incorporated these new strategies into preparation for the season, which made for a more effective and efficient program that returned millions of dollars on our client’s investment.
- Landlords, in general, are taking longer to prepare reconciliations, and respond to requests for back-up, but that has not stopped them from continuing to forecast for the new fiscal year. How can the landlord know their budget if they have not finalized last year’s actual expenses? This is a trend that has the potential to have you spending money that may not be due.
- Many real estate departments have been reduced, but with greater and greater requests for information and responsibility
- Many tenants are unwilling to audit locations due to smaller size or liability or due to other considerations. Ensuring costs are correctly billed is good practice regardless of size and demonstrates good controls on the part of the tenant.
Strategies for A Successful Operating Expense Review
This year, as the season starts, consider adopting the steps that we use to minimize client risk, increase communication, and uncover audit opportunities. Incorporating these into your program could allow you to uncover significant savings, reduce time spend, and increase piece of mind.
Start By Knowing What to Expect
- Recovery Type – Compile a listing of non-gross locations where the landlord is required to send a reconciliation
- Review the portfolio early in the year to identify key locations or specific opportunities. Communicate these to the Accounting Department so they do not pay the bill before it can be challenged.
- Tracker – Give notice to any landlord who has not sent a reconciliation by end of Q1, and then again in Q2. Depending on your relationship and risk tolerance, consider resisting any adjustments without pricing actual expense reconciliations.
Start With All of the Information
- Basic Abstracts – Identify key elements of the financial liability. (Dates, Dollars, and Options).
- Audit Clause Terms – Define each party’s requirements and under what terms the Tenant may protest billing to the Landlord.
- Thorough Back-Up from the Landlord– Get an explanation for all items included in the billing and a detailed breakdown of large items, copies of the insurance invoice, and “paid” tax bill.
- Locate any information regarding changes to the dates &/or space.
- Receive confirmation from your Accounting Department as to what has been invoiced from the Landlord.
Build & Maintain A Systematic Process
- Look at all Lease payments, regardless of size.
- Create a review worksheet tool if you have multiple locations to ensure consistency and thoroughness.
- Review the items suggested above as soon as the billing is received. For anything unexplained or unusual, have a form Letter, with payment, ready to send, indicating that the billing is being paid under protest.
- Maintain a Billing History so future years can be compared for percentage change and consistent treatment. Consider any changes suspect and challenge them for immediate explanation.
- Let your Landlord know that your review is more of an “Accounts Payable” due-diligence rather than an Audit. This avoids “exhausting your audit rights” as may be dictated in the lease.
- Solicit the input from outside. Consider getting a second opinion or asking for help from a trusted source.
- Consider reducing or stopping accrual payments for any location where a prior year reconciliation has not been received.
Be Sure to Challenge These Typical Mistakes
- Errors in calculation method or math.
- Pro Rata Share inaccuracy or unexplained changes.
- Mistakes in proration for occupancy (time).
- Large and unexplained percentage changes (year over year).
- Changes in methodology of expense treatment.
- Aggressive allocation or gross up.
Need more tips and strategies for a successful Operating Expense season? Just Ask PSG!