The Operating Expense Reconciliation Statement: How to Reduce the Cost of Operative Leases

by Jason Aster

Operating Expense Reconciliation Statements, taxes, utilities, sundry services and supplemental cleaning is where tenants and organizations can find the opportunity to save millions. Take advantage of the OpEx true-up and avoid overpaying with these tips.

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Every year landlords send Operating Expense Reconciliation Statements (“OpEx true-up”) to their tenants, and every year most tenants submit the payment requested without a second thought.  

With just 30-60 days to respond to an OpEx true-up, most organizations don’t have time to thoroughly examine their OpEx liabilities and compare them to the original interpretation of their lease. In that timeframe, most tenants barely have time to submit payment, let alone tally overbillings in a formal notice to their landlord.  

Yet additional rent expenses like OpEx, taxes, utilities, sundry services and supplemental cleaning is fertile ground for tenants to find significant savings - in some cases in the millions of dollars - if you know where to look.  

Here are the steps you need to follow to take advantage of the OpEx true-up and avoid overpaying.  

Extend the response window if you can  

First, gain as much time as you can to properly uncover and resolve any discrepancies. Your lease contains a dispute / “lease audit” notice deadline setting forth the amount of time you have to object to charges on the Operating Expenses Reconciliation Statement. This is expressed as a certain number of days after the date upon which you receive the OpEx true-up statement. Find it in the audit rights provision of your lease.  

Thirty to sixty days to submit such a “lease audit” notice just isn’t enough to complete a proper examination of the bill against the lease, especially for a client with multiple leases.  

While each state’s law differs, the statute of limitations for a breach of contract claim can be five years or more. So leases that provide even a 180 day dispute notice deadline severely curtail what would otherwise be available per the state statute of limitations.  Keep this in mind when negotiating a new lease; while you likely won’t be able to match the response period to the statute of limitations, you should certainly request a more reasonable amount of time to review the OpEx true-up against your lease obligations, identify any errors, and present them to your landlord. Requesting a year or two to review the charges gives tenants enough time to be diligent, while also being fair to the landlord, who wants to settle the bill and eliminate open-ended liability.  

Keep key dates in mind 

If you can anticipate the relevant deadlines, you are better positioned to act quickly to meet them. Sadly, most tenants often overlook the “lease audit” deadline.  The actual date of the objection notice deadline will likely change every year, since the deadline depends on the date you receive the OpEx true-up. While you won’t know the exact dates ahead of time, each landlord tends to deliver its OpEx true-ups within the same few weeks each year; this way you can estimate the timeframe to within a few weeks so you’re prepared to move quickly as soon as the OpEx true-up arrives.  

If you have short dispute periods in your current leases, but have some concerns with last year’s OpEx numbers, consider sending a friendly note to your landlord requesting that they toll the notice deadline. This way, the landlord may agree to give you more time to informally ask questions and review more detailed data in order to avoid a protracted and invasive “audit” of its books and records.   

Compare the true-up statement to your lease 

As the estimated window for the OpEx true-up approaches, you can gather the appropriate leases and be prepared to quickly review the true-up as soon as it arrives. There are several areas where tenants can often achieve significant savings. Take a close look at the following and compare to the language in your lease: 

  • Operating and sundry expenses, including base year adequacy, pro-rata share calculations, allocation of expense pools, expense stops, exclusions and pass-throughs, caps (controllable vs non-controllable classifications), capital expenditures, management fees, extraordinary charges, after hour HVAC, freight elevator usage, and all CAM components. 
  • Base rent issues, including per-square-foot rent calculations, CPI calculations, rent commencement issues, subtenant chargebacks, tenant improvements, and other credits. 
  • Real estate tax billings, including refunds, tax certiorari proceedings, improper inclusions, and improper allocations. 
  • Utilities and electric expenses, including application of rates, proper schedules, surcharges, correct meter allocation and reading, and usage assumptions. 

Depending on how sufficient your lease language is around each of these expenses, you may be able to identify areas of exposure and negotiate savings.  Many tenants turn this responsibility over to specialists (often called lease auditors), to further optimize the results available through such an exercise.    

Don’t let a brief window prevent significant savings 

While the window for OpEx true-ups is often short, you can still achieve significant savings if you’re prepared to move quickly, compare key expenses to the language in your lease, and document any discrepancies.  

Depending on the size of the space you lease, your OpEx liability, the materiality of any issues you identify, and whether the savings have an ongoing impact, your savings could be in the millions of dollars. Don’t let this opportunity pass you by.  

Jason Aster is the Managing Director at KBA Lease Services