Are You Being Overcharged On Your Commercial Lease?
If you thought you were being overcharged on your Commercial Lease (as is the case in the vast majority of cases), most Tenants are not going to go out and hire a $300 per hour accountant or attorney to find out “if” they are being overcharged. It is not logical that they would go out on pure speculation and try to identify whether their Landlord had been inadvertently overcharging them for a number of years. Now, Tenants have a way to engage the services of professional commercial lease experts on what is called a Revenue Shared Benefit basis. Here is what this means.
Instead of hiring a Real Estate attorney or accountant, the professional commercial lease experts review your existing lease to determine if there is an opportunity to recover a substantial amount of money for you, before they do the work. As they are successful over 90% of the time in taking this approach, the time it takes to gather up the basic information that they need is well worth the time and effort. You then share in the Revenues that the Auditors created for you on a 50/50 basis on both a retrospective and prospective basis. If you think about it, there is no risk to you. This is because, “if you did nothing”, you would continue to pay what you are doing now. And, the auditors are taking all the risk, because on the average, they spend hundreds of hours of work on each commercial lease that they review. So, it is in their best interests to work as hard as possible for the Tenant, in order to recoup the substantial out-of-pocket expenses that they incur in performing their services, and make a profit. In other words, their compensation is truly based on performance.
The benchmark that you usually would need to meet to qualify for a commercial lease audit is:
- An annual commercial lease portfolio of at lease $200,000 per year (approximately $16,666.67 per month or more)
- Having been in the property at least 3 years
- Not be on a Triple Net lease (this lease type is explained in full later in this article).
Commercial Leases generally are categorized as:
- Net Lease – Tenant pays the Property Taxes,
- Net, Net Lease – Tenant pays the Property Taxes and Insurance, and
- Net, Net, Net Lease (aka NNN, Triple Net, etc.) Tenant pays Property Taxes, Insurance, and CAM Charges (Common Area Maintenance costs). CAM Charges can include maintenance costs such as waste disposal and landscaping, and even costs such as Security (alarm service and/or security personnel).
Commercial Lease audits can be applied to Office Buildings, Retail businesses, Hotels, Restaurants, and even Sports stadiums and arena’s. They can be even done for Manufacturing companies. And, it is even possible to do a hybrid type of commercial lease audit where you have a Franchisee that actually is beholden to the Franchisor who owns the building that they are running their business in on a daily basis. In this type of audit, it is actually conceivable that the audit would be done on the Franchise Agreement itself between the Franchisor and Franchisee to determine if there have been any overcharges to the Franchisee.
Commercial Leases represent a quagmire of potential problems, because the business owner is not a Real Estate expert. Typically, if a business is acquired by purchasing an existing business, it comes with an existing lease that has a right of assignment in it. Let’s take an example of a business executive who made some good money in a corporate position, and now wants to dive into buying a business (or a Franchise business). They wake up one morning and get an entrepreneurial seizure about this vision that they have that they could open the greatest restaurant in the World, and set out to either buy an existing business through a business broker; or, to find a piece of commercial property that they can lease to build their business.
Their focus is on the location of the property, as all the expert advice about the success of their business screams at them, “Location, Location, Location”. Let’s take the scenario first where this fictitious new business owner decides that they have found the location of their dreams for their business, and it is located in a prime shopping center with excellent foot traffic in a major city.
In negotiating a commercial lease, the prospective new business owner may be presented with a lease that is unlike anything that they have ever heard of before. It is called a percentage lease. Unlike a regular lease, where they would pay a certain dollar amount each month that can and will escalate during the term of the lease, in a percentage lease, the Landlord has told them that it is standard practice in their shopping center to charge their tenants a percentage of gross receipts from their business. As an example, a Nationally renowned Franchise group in a major Metropolitan area is paying between 10-14% of gross receipts on their Quick Service Restaurants (QSR’s). Leases in secondary markets may range from 3-12%, depending on the nature of the business, and its related “foot traffic” (how many people walk by their location on a daily basis).
Under a Percentage Lease, the Percentage of Receipts (usually Gross Receipts) augments a “minimum base rent” to ensure that the Landlord, who is sharing the risk if a tenant, like a restaurant, has to close because of a lack of revenues, as is frequently the case. So, in that case, the “minimum rent base” protects the Landlord from this occurrence, in that the Landlord knows that if the business tenant has to sell their retail location, that they will be getting a minimum amount of monthly revenue from that commercial space. Assuming the tenant is able to stay in business, the “Gross Receipts” collected by the Landlord can be done on a monthly, quarterly, semi-annual, or annual basis. The Landlord has the right to inspect the Tenant's books.
In this regard, let us go back for a moment to the business executive opening up their dream restaurant. Even if they are astute enough to have a real estate attorney review the lease, how does that protect them going forward? Let’s say, for example, that over the years, they get a new Landlord who interprets their Lease differently than the original owner. And, then; during the year, their bookkeeper gets all these bills from the Landlord. How do they know that they are correct? They don’t. And, that’s the point.
The goal of the commercial lease auditor is simply to find out whether the Tenant has been charged correctly, or incorrectly. Once a review has been done, the auditor gets together with the Landlord, and goes over their findings. Once the Landlord agrees to part or all of the findings, a letter is sent to the Landlord, which a copy to the Tenant. The letter interpolates the findings into a dollar’s and cents result in a straightforward manner.
Finally, the tenant has the services of the commercial lease auditors on an ongoing basis, which is the equivalent of having a $300 an hour attorney and accountant on their payroll. And, because the purpose of the commercial lease audit is simply to ensure that the Tenant is paying to the Landlord the correct amount of money, per the terms of their Lease, it is in the Landlord’s interest to keep their tenant happy.
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© 2006 Permission granted to BlueMauMau.com to print this article.
Ron Feldman, President, World Business Services, Inc. 606 Western Avenue, Petaluma, CA 94952. Office Phone: 800-892-0879 (M-F). Email: bizamerica@aol.com
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