When is the best time to perform a lease verification?
A basic lease verification should be performed every year. This should include a thorough vetting of the year-end reconciliation package, addressing such question as:
- Is the year-end package complete within the requirements of the lease?
- Is the year-end adjustment invoice mathematically accurate?
- Are the rental installment payments accurate?
Where available, in-house lease administration and property accounting employees can be trained to perform a basic lease verification.
Every three to four years, a more in-depth lease verification will ensure consistent compliance with the lease over the entire term. This level of lease verification involves requesting additional information from the landlord that is not presented on the statement of expenses for review and analysis. The types of issues being verified at this level vary greatly depending on how strong the operating expense clauses of the lease may be, and how much detail the landlord may or may not provide in its statement of expenses.
When errors of methodology are found during a lease verification, it is important to review the subsequent year to at least ensure that correction to the methodology is carried forward and future year savings are realized.
Specifically, it is prudent to perform a lease verification:
In the first year of the term of a new lease: rent is a major expense typically occurring over a long period of time. It’s prudent to start off verifying compliance of hard-won lease negotiations.
After building ownership changes hands: this is particularly true if the change in ownership occurs part way through the landlord’s fiscal year. Methodology and allocation of operating costs varies greatly by landlord. It is important to note and verify whether the lease allows for any changes when the property changes ownership. Additionally, it is important to ensure the billing is only for 365 days and there is no overlap or duplication of charges that may inadvertently occur when one year is being billed proportionately by two different landlords.
Operating cost increases: when the overall operating cost increase over the prior year’s actuals is greater than 5-10 per cent, or when year-over-year line-item expense variances are material, depending on market factors.
Renewals: when planning to renew the lease, a lease verification in the year before the renewal is often helpful in identifying any issues to be resolved during negotiations.
Moving: when considering moving, a lease verification of the year before the move is prudent to ensure the operating costs are in compliance with the lease before the relationship ends and any leverage for the recapture of overcharges may be lost.
Simply put, any time is a good time to perform a lease verification. However, there are times when a more detailed lease verification is of particular importance.