Audit Case Study Synopsis™ (3564)
New York, NY
Savings (square foot)
Exclusive Service Provider
North American Portfolio
RRG’s audit encompassed three (3) operating years and two (2) ownership entities.
Initially, the landlord was unable to provide the requested information for one (1) of the operating years noting that the documentation did not transition as part of the building sale. RRG coordinated with representatives of the prior ownership which happened to be a dissolved trust in order to locate the missing, archived records and obtain a the complete document set.
Through the audit, RRG confirmed material overcharges surrounding the improper application of cleaning credits. The landlord had received cleaning credits from the janitorial service provider for space that the client leased, but did not actually occupy and thus was not being cleaned. Rather than providing the full amount of the credits, the landlord actually inflated the charges by applying a “gross-up” factor to the overall cleaning costs to reflect costs as if the space was being cleaned and then charged back the client its pro-rata share of same. As such, the client was being charged twice for space that was not even cleaned and that it did not occupy. RRG unwound the calculations and applied the proper accounting methodology to align the cost structure with the cleaning contract terms.
Additionally, RRG noted several amortization entries that did not qualify as operating expenses pursuant to the terms of the lease. For several years, the landlord had charged various non-qualifying capital expenditures to operating expenses in the form of amortized expenses. The lease was very specific about the types of allowable capital expenditures which only included government mandated improvements, labor saving improvements and “in lieu of repairs” improvements.
Following RRG’s completion of a utility usage analysis, we were able to confirm that, as required, all tenants in the building were separately metered for usage and that the electricity charged to operating expenses only represented the common area electric. However, RRG determined following a review of the general ledgers, supporting documents and the utilities report that the pass through included gross receipts tax which was distinctly excluded per the requirements of the lease. The source of the issue was that the landlord was generating the utility cost data from a third party prepared usage report where such tax components were inappropriately, embedded in the utility expenses charged to the common area.
The landlord initially disagreed with all the audit findings, but following the conclusion of the negotiation, refunded all amounts represented within the audit reports.
After Hour HVAC
Utilities (Gross Receipt Tax)