Yes, this is the hard part, but it can be fun if you actually do it during regular working hours.
There’s a saying that “Talk is Cheap”, and that theme certainly applies to escalations. It is a certainty that you won’t receive the correct amount of expense reimbursements unless you put some serious thought and effort into the task. If done properly, the "doing" part of preparing escalations can be stimulating and rewarding, and also a savvy way to build trust with your tenants. But when done improperly, escalations can be tedious, time-consuming and just flat out wrong. At their worst, escalation problems can turn into a tenant relations shootout or nightmare.
Speaking of shootouts and nightmares, I’m a big movie fan. Metaphors for the normal things in our lives are everywhere on screen, even for escalations. For instance, think of Clint Eastwood’s role in The Good, The Bad & The Ugly – that’s what escalation auditors aspire to be: the good guy who methodically knocks off the bad guys and gals who send out incorrect invoices. And how about that old classic Frankenstein? A well-meaning doctor of the same name attempts to create life but instead creates a monster, spurring the villagers to grab their pitchforks and wreak havoc. This gory story reminds me of the well-meaning property manager or property accountant who crafts his or her own Excel spreadsheet for escalations, and ultimately pays for it with a tenant revolt - or even worse - achieves the ultimate insult in tenant dissatisfaction: the dreaded "tenant union." And what about Paul Newman in Cool Hand Luke? As cool as he was, also the most successful hard-boiled egg eater a southern prison has ever known, he still suffered the consequences of a “failure to communicate” and paid dearly for the oversight. Getting back to reality and real estate begs the question: “Will your escalation billings survive the communication test?”
So, you have the checklist described in Part 1, and by now you have collected all of the information it lists (if not, time to get crackin’ – the escalation clock is running). If so, you are off to a good start. What comes next must be done methodically.
Checklist of Documents Required for Doing the Work
Expenses
- Load final 2009 expenses into your billing software
- Review the 2009 General Ledger (GL) for any mis-classed items, errors, omissions,or necessary corrections
- Analyze your January 2010 GL for expenses relating to 2009 that need to be added back to 2009 (Accruals)
- Gross up your variable expenses (using BOMA-approved methodology if possible)
- Determine which (if any) capital improvement scan be escalated in 2009
- Create one expense pool for your standard leases and as many others as necessary for your nonstandard leases
- Abstract all new leases or any existing leases which were modified leases in 2009, and load the escalation info into your billing software
- Prepare a schedule of 2009 prepayments by tenant
- Prepare a schedule of occupancy by month (both leased and physical occupancy)
- Determine which tenants may have their 2009 expenses limited by Expense Caps
- Combine your Expenses and Rent Roll data in your billing software, shake well, and review the results with senior management/ownership
- Do your 2009 escalatable expenses look reasonable in comparison to 2008 actual and your 2009 budget? (if not, investigate any large discrepancies)
- Are any tenants getting an unusually large charge or credit? (if so, investigate to ensure that it is appropriate)
- Are your capital improvements being treated in accordance with the leases, and are they consistent with prior years? Can you add imputed interest to the cost?
- Are your gross ups reasonable? One good rule of thumb is that the percentage increase of each gross up should never exceed the percentage increase in occupancy. For example: If you are grossing up a 75% occupied building to 100% that is a 33% increase in occupancy (25% divided by 75%), so your gross up for any account should never exceed 33%. For example:if your actual cleaning contract expense was $100,000, your gross up should never exceed $133,000):
