FRAZIER BAKER and WILL BARDEN
When it comes to an annual property tax and operating expense pass-through, it may really cost you to let an invoice for this simply slide through to your accounts payable department without a second glance.
A couple of weeks ago we wrote an article about these annual statements prepared by your landlord as a means to pass along any increases in property taxes and/or operating expenses above a base-year calculation set forth in your lease. We promised a real life example of costly errors in these statements as a follow-up. Our example is the perfect “everything that could go wrong did go wrong” story to illustrate the value of due diligence in contesting an unanticipated balance due. Here’s how our particular story played out and some valuable lessons you can take away from it.
Lesson 1: Be wary when you receive an invoice for a property tax and operating expense pass-through for an unexpected amount, particularly when you’ve been making monthly estimated payments.
Our example begins with the tenant receiving a demand letter for $6,000 for an outstanding balance on the tenant’s account.
Lesson 2: Don’t be afraid to ask for detailed information.
On the client’s behalf, we requested the prior year’s information. When that didn’t resolve the difference, we went back four years in order to find a starting point where things appeared to be properly in balance. This particular client had been making timely payments and hadn’t received any kind of monthly statement, so it simply didn’t make sense that there could be any substantial amount owed.
Lesson 3: Reconstruct the account for the period in question, reconciling the contract rent from the lease, and pass-through amounts from the annual tax and operating expense statements, to the tenant’s actual disbursements. Look for unusual or suspect entries.
Our reconciliation uncovered several errors. First, the tenant had been making estimated operating expense payments along with their rent payments and had not been credited for those. The landlord’s property accounting department had understated the amount actually paid by the tenant by some $4,600.
Next, we found a $6,000 debit to the tenant’s account that was labeled as “True-up of CAM expense” without the matching credit entry. Finally, a budgeted amount of current year expenses was simply wrong – leading to an excess amount of $3,800 – which had actually been paid by the tenant.
Not only did the tenant not owe the $6,000 stated in the demand letter, our analysis revealed that overpayments had already been made totaling $8,400. As a result, the tenant was able to reduce their next rent payment by a total of $14,400. This is a somewhat unusual case in that numerous errors were made along the way, but it is the ideal situation to illustrate why you shouldn’t simply accept an annual reconciliation of tax and operating expense without verifying and auditing the request closely. If you need help digging, ask your broker for assistance.
Frazier Baker, vice president of office services, and Will Barden, vice president of office services, provide office tenant representation services for Colliers International Memphis.