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A key to identifying excessive escalation charges -- hidden costs in landlord payrolls

Your facility could easily be paying excessive escalation charges and not know it.

That’s because landlords commonly send out expense statements which show building labor costs of several hundred thousand dollars, or even several million dollars, as a single line item. Without further justification, you are asked to pay a portion of these costs. Reviewing the landlord statements won’t tell you whether charges billed are permitted by your lease.

Audits of many building ownerships’ back-up data reveal that excessive escalation charges frequently occur because of excessive labor costs which are sometimes more than 60% of a building’s operating expenses.

Here are 7 key issues that should be investigated to determine whether all labor costs billed are permitted by your lease.

-- Has your landlord billed only labor costs related to your building?

Building owners frequently allocate certain labor costs among several properties they own. This can result in overcharges to you if the allocation is inappropriate. The cost of specialized engineers, for instance, might be spread over several properties, although they spend most of their time at one building with a temperamental HVAC system. Moreover, seeking to cover all overhead costs, some landlords will seek to bill home-office personnel and others such as project accountants, insurance managers and the like as operating expenses.

-- Has a special relationship between your landlord and the vendor improperly increased your operating costs?

A well-drafted lease will protect you from paying an above-market rate when your landlord chooses to deal with a related party. To determine whether the charges you’ve been billed violate this caveat, it will be necessary to survey other comparable buildings taking into account such things as the tenant mix, age, size and location of the building and other factors.

-- Do all labor charges billed relate to work actually performed?

To verify that all charges represent work actually performed, a landlord billings’ auditor must review names, job titles and descriptions of those billed to payroll. Next, determine that positions billed actually correspond to work performed at the building.

-- Have executive salaries been billed as operating expenses?

Building owners often charge executive-level managers, regional and functional heads to building operating expenses. Detecting such charges can be tricky, because they can be billed in myriad ways – travel, office and entertainment expenses as well as salary and fringe benefits. Identifying such illicit charges requires understanding a landlord’s corporate structures and staffing practices.

-- Have labor costs been double-billed?

Tenants usually pay landlords directly for incidental services such as changing light bulbs, repairing plumbing and manning a freight elevator after-hours. Labor costs associated with these services often remain on the building payroll and are included in operating expenses – double-billing. If incidental services are provided to some other tenant, there is also good reason to exclude the associated labor costs from billable operating expenses. Only a detailed audit of a landlord’s billing practices will uncover double-billings.

--Is your building owner improperly overstating labor costs through a “gross-up”?

In many leases, landlord and tenant agree to a “gross-up” clause which provides that if in any year the building is less than fully occupied, expenses will be adjusted (“grossed-up”), to reflect the costs that would have been incurred in a fully occupied, normally operating building. If your landlord grosses-up labor costs not affected by occupancy levels, or improperly calculates the gross-up, your labor costs and operating expense escalations will be overstated. A landlord billings auditor should review the method of gross-up calculation used by your landlord, actual building occupancy levels, and building operations to determine which labor costs should properly be grossed-up

--Is your landlord charging too much for incidental services?

In many cases, landlords charge up to 250% more than a lease permits for incidental services. To verify that you are being billed correctly for such items, a landlord billings’ auditor should review your lease and note any restrictions. The auditor should check union contracts, tariff schedules, market-rates and similar data.

An annual audit of labor costs should help minimize your occupancy costs. Such audits can help minimize improper billings, because they will show your landlord that you insist upon being charged only what your lease permits. Any savings will go right to the bottom line.