June 2001

Lease Compliance Review: Where the Money Is

What Is Lease Compliance Review?

In Part 1 of this series, we introduced this new type of client service. To recap briefly, lease compliance review is a structured advisory practice that determines whether landlord-generated rental invoices are in conformity with the financial provisions of the lease governing the terms and conditions of a rented piece of commercial real estate.

What Does Lease Compliance Review Accomplish?

The primary objective of any lease compliance review is to detect errors in the invoicing process. Once identified, these errors can be corrected and the client’s accounts reconciled. Rental overpayments that go undetected can, especially when compounded over many years, lead to serious distortions in the client’s audited statements.

How Are Mistakes Discovered?

Lease compliance reviews as now practiced are based upon the functionality of The LeaseCheck® System: The New Profit Center for the Full Service Accounting Firm. This system searches through three key error zones where 99 percent of all invoicing errors occur. These error zones are like the points of a triangle.

Screening each of these progressively adds greater levels of accuracy to the lease compliance review. They are:

Cost-Curbs. The first screening process begins by looking for cost-curbs, which are devices such as caps (maximum amounts payable in a time period), stops (minimum amounts expended before a tenant’s payment obligations begin), exclusions (categories of expenses deducted from billable charges), and offsets (credits against billable charges) to help control occupancy expenses. Clearly, a real estate tax bill in the amount of $10,000 is in error if a lease limits this expense to $5,000.

Procedural. The second screening process looks for errors in basic computational variables such as the size of a tenant’s space, his prorata share of the property total space, applicable cost of living indices, and so on. Errors usually occur when the landlord applies a wrong procedural variable.

Content. The third set of screens is designed to detect errors in the aggregate cost of any given expense category. Clearly, if the total cost of a property’s real estate tax bill is overstated, then to the extent that tenants are billed a proportion of this total, the resulting invoice will likely be overstated as well

Where’s the Money?

The LeaseCheck® System looks at where the money is. It accomplishes this by subdividing the three key error zones into subsections designed to make the invoice screening process manageable for the CPA.

How Frequently Do Errors Occur?

While each tenant situation is unique, a lease compliance review enables the CPA to identify errors whether they are intentional, honest mistakes or those caused by differences in interpreting lease provisions. Leasing specialists believe that up to 25 percent of the 75,000,000 annual rental invoices contain errors. Whatever the cause, mistakes do occur and with remarkable frequency.

What Happens When Errors Are Identified?

A lease compliance review attempts to validate the accuracy of the tenant’s rental invoices. Sometimes many years’ worth of information will be analyzed. Once this process is completed, a documented report is submitted summarizing the status of those invoices believed to be in error. This report will include the invoice number, invoiced amount, correct amount, and reason why the item is in error. The LeaseCheck® System provides a structured format for presenting this information, as well as a time-tested methodology for seeking reconciliation with the landlord.

What Is the Ultimate Objective of a Lease Compliance Review?

As with all client services, the objective is a satisfied client. The review accomplishes this through providing the client with the peace of mind of knowing his rental invoices are being accurately invoiced and paid. When this is not the case, and the client is entitled to rent refunds, client satisfaction usually results when the overpayment is refunded. For more information on lease compliance review, visit www.leasecheck.com or call (908) 233-5982.