May 2001

How to Start a Lease Compliance Review Practice

CPAs have responded to the needs of their clients by offering nontraditional services such as business valuation, compensation planning, elder care, litigation support, estate planning, asset protection, business brokering, and e-commerce. In addition to these services, CPAs now can provide lease compliance review, a structured advisory practice that determines whether landlord-generated rental invoices conform with the financial provisions of the lease governing the terms and conditions of a rented piece of commercial real estate.

Why Is Lease Compliance Review Necessary?

Landlords typically invoice tenants on a monthly basis for minimum rent (base rent) and additional rent items such as real estate taxes, common area maintenance (CAM), building operating expenses, heat, light, water, steam, and security. Because these items generally are estimates, reconciliations are prepared and distributed annually.

The billing errors that are frequently made during the invoicing process can go undetected for years, resulting in significant rent overpayments. In fact, it is estimated that up to 25 percent of invoices contain overcharges—a troubling figure, considering that occupancy costs represent the second largest expense after payroll for most organizations.

Errors occur for a variety of reasons, but the majority are caused by the landlord’s failure to use correct variables like escalation indices, pro rata share, and cost curbs when computing invoices. Rent escalation is one of the most common overpayment errors.

Most tenants do not have the technical skills to identify or correct landlord-billing errors. Without professional oversight, overbilled clients will continue to make overpayments. The compounded effect of such overpayments can damage a client’s profit/loss position and distort his audited statements.

How to Begin a Lease Compliance Review Practice

Providing lease compliance review services requires almost no initial investment but can generate profitability exceeding that of traditional accounting services. The LeaseCheck® System: The New Profit Center for the Full-Service Accounting Firm is a training guide that provides the instruction and worksheets necessary to perform lease compliance reviews.

Accountants should then inform their clients of the “rent overcharge” problem, perhaps through a letter that also introduces them to the lease compliance review service.

After introducing clients to the service, a follow-up meeting should be arranged to discuss the benefits of an ongoing lease compliance review program. Several case study examples should help convince the client that, despite the quality of the accounts payable staff, costly and frequent errors may have occurred.

A Win-Win Situation

With more than 40 billion square feet of commercial real estate under lease in this country, the CPA who offers this new service has a distinct advantage in today’s increasingly competitive environment.

For most clients, lease compliance review engagements will be fee based. However, a flat fee based on time of review (typically 1–8 hours) or the square footage of the lease under review (approximately 50 cents per square foot) is recommended. In some cases, a contingent fee tied to the amount of rent overcharges recovered from the landlord is acceptable.

The lease compliance review service can provide clients with the peace of mind that they are paying only what their lease requires. It can also lead to a rent refund from the landlord, which tends to have the effect of ensuring that future invoices are posted correctly.

The lease compliance review also can lead to a deeper involvement in clients’ real estate affairs through fee-based activities such as lease administration, lease negotiation, and real estate brokerage and advisory services.

For more information on lease compliance review, visit www.leasecheck.com or call (908) 233-5982.