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The power of lease audits: savings, compliance, strategic delivery, and more

01 July 2024

The power of lease audits: savings, compliance, strategic delivery, and more

The lease stands as the cornerstone of occupier-landlord relationships in commercial real estate. Yet beneath the surface of these meticulously drafted documents lies a complex web of financial obligations and legal stipulations that can easily become tangled. The more leases an organisation has, the higher the risk of costly trip-ups.

A lease audit is a powerful tool that not only untangles these complexities but also uncovers hidden savings, ensures compliance, fosters better business relationships, and supports more strategic decision-making.

But what exactly is a lease audit, and why should it matter to businesses and property owners alike?

Ken Gerber, COO of Cushman & Wakefield | BROLL explains that a lease audit is a deep dive into the details of a lease to ensure that all its terms and obligations are being met and that neither party is being shortchanged.

"The importance of lease audits cannot be overstated. For tenants, a lease audit can reveal discrepancies or errors in billing that might result in significant refunds or savings. For landlords, it ensures that they are receiving the correct payments and that the property is being maintained according to the lease terms. Essentially, lease audits help both landlords and occupiers achieve their financial and operational goals," says Gerber.

The devil is in the details

In essence, a lease audit is the comprehensive review and verification of the accuracy and compliance of a commercial lease agreement. This meticulous process covers various aspects, such as rent, operating expenses, taxes, maintenance, utilities, and other charges that could be either billed to the tenant or paid by the landlord.

Beyond financial scrutiny, it also assesses the market value of rent, what services should be provided at the property and by which party, and other lease terms and events.

“With an up-to-date lease audit in place, both the occupier and the landlord can enjoy a smoother relationship by being on the same page regarding their obligations and having a clear understanding of their responsibilities. This can lead to greater satisfaction and trust, fostering a more cooperative, productive, and even longer-lasting partnership,” says Natasha Bruwer, Managing Director for Occupier Services at Cushman & Wakefield | BROLL.

Conducting a lease audit is a detailed and structured process. It can be done in-house by a tenant or a landlord, but due to the wide range of expertise needed, it is usually placed in the skilled hands of a third party experienced in commercial real estate and lease auditing, especially in a specific market, with strong professional ethics, including integrity, confidentiality, and impartiality. Beyond this, proficiency in data collection, analysis, and reporting has become essential.

For Cushman & Wakefield | BROLL, a critical part of a lease audit is taking a data-focused approach. It's essential to gather and analyse complete and accurate data about all leases. This helps drive strategy and ensures better transaction execution.

Clean and current data

In today's world, data reigns supreme. As businesses and property owners aim to get the best value from their leases, a meticulous and tech-driven approach to lease audits signals clear and reliable assurance.

Wynand van Jaarsveld, Director of Data & Finance for Occupier Services at Cushman & Wakefield | BROLL, points out that there are often common challenges at the start of the lease audit process. “Sometimes, property data is incomplete, important lease events are not visible, and rental data captured manually can be inaccurate and lead to incorrect payments. In addition, data might not be aligned with regulatory compliance, such as IFRS 16/ ASC 842, and different data sets can make it hard to maintain transparency and good data governance.”

Addressing these challenges through a comprehensive data cleanse and property contract review is a crucial step in the Cushman & Wakefield | BROLL lease audit process.

“We take a systematic approach to lease audits and payment reconciliation. First, we gather all lease documents and upload them into specialised abstraction software. The software extracts key information, checks for missing data and identifies any gaps. For payable leases, this involves matching sites to payment records, checking for any differences, and preparing financial models and reconciliations. For receivable leases, a similar process is followed, ensuring that all billings are accounted for and reconciled,” notes Bruwer.

Tech-driven approach

The role of technology in lease audits cannot be ignored. Advanced software and AI tools have made lease audits quicker and more accurate. These tools can process large volumes of data quickly, spotting patterns or mistakes that humans might miss.

“By using these technologies, we can give our clients more detailed and actionable insights to help them get the most value from their leases," says Bruwer.

Building a strong system

Lease audits are not just about finding and fixing mistakes. They also help create robust systems to prevent future errors and ensure ongoing compliance. A detailed report with findings and recommendations is provided, which can then be used to make informed decisions and adjustments.

If monitored and maintained on an ongoing basis, the benefits of a lease audit can be sustained over the long term.

Lease audits are not all equal

The scope and depth of the process may vary depending on the number, complexity, and duration of the leases in a portfolio.

They can be done on a once-off basis or as an ongoing process, and once any required adjustments are identified and quantified, they can include negotiations, resolutions, lease management, real estate strategy updates and any number of real estate solutions.