Lease Police Blog

Author: Pruden Phyliss

  • Part 1 of 3 — Occupancy Costs: From Negotiation to Reconciliation
    Occupancy Cost Management

    Where Occupancy Cost Risk Really Begins

    By the time you are reviewing reconciliations, the outcome has already been decided.

    8 min read  •  Part 1 of 3

    “Proactivity in lease administration follows the same theory as crime prevention. When this work is done well, the result is often measured by what did not happen.”

    I have said this before, and it is a principle I come back to often. It captures something essential about what we do in lease administration. The wins are not always visible. They show up in the overcharges that never made it to an invoice, the cost escalations that were caught before they compounded, and the lease language that held up when it was tested.

    CAM and operating expense reconciliation season is when lease administrators tend to feel some pressure. Reconciliations come in. The math and logic need to be validated. Questions and back-and-forth communication start stacking up. But here is the truth: by the time you are reviewing reconciliations, much of the outcome has already been decided. Occupancy costs do not start with the reconciliation. They start with how the lease was negotiated.

    This is the first post in a three-part series exploring how to proactively manage occupancy costs across the lease lifecycle. We are starting where the risk starts: in the lease language itself.

    Quick Clarification

    A question came in from my prior blog about the difference between “CAM” and “operating expenses.” Like most things in lease administration, the answer is “it depends on how the lease is written.” Generally, CAM is associated with net leases commonly seen in retail and industrial, while operating expenses are tied to base year or modified gross structures typical of office leases. There are always exceptions, but that is the standard industry differentiation.

    Where Risk Lives in the Lease

    Many occupancy cost issues can be traced back to lease language. On the surface, the language may appear reasonable, but in practice, it can shift costs in ways that are difficult to untangle and even harder to dispute. These items are often subtle during negotiations, but they can have a significant financial impact over time.

    I want to focus on four areas that I see create the most risk.

    Capital Expenditure Treatment

    One commonly overlooked gap is how capex is handled within operating expenses. Many leases exclude capital improvements, but then carve out exceptions allowing those costs to be passed through if they are expected to reduce operating expenses, often without clearly defining how that reduction is measured.

    This can open the door to large projects like roof replacements, HVAC upgrades, or energy efficiency initiatives being passed through over time. What is often missing is how those costs are amortized, a clear definition of what constitutes a capital improvement, and whether interest charges are included in the amortization. Each of those gaps can add meaningful cost over the life of a lease.

    Controllable vs. Non-Controllable Expenses

    Leases may include caps on controllable expenses, but if the lease does not clearly specify what falls into that category, there is flexibility in how costs are classified. Expenses like security, landscaping, janitorial, administrative costs, or certain maintenance programs can fall into gray areas.

    Over time, those gray areas tend to get resolved in one direction: more costs get categorized outside the capped bucket. The cap still exists in the lease, but it may not apply to a meaningful portion of total expenses. The protection it was intended to provide gets quietly reduced, and occupancy costs end up higher than expected.

    Gross-Up Methodology

    Gross-up provisions are frequently included but not adequately defined. A lease may allow expenses to be grossed up to a certain occupancy level, but fail to define which expenses are eligible, what occupancy percentage is used, or how the calculation is performed. This can result in tenants paying for expenses that were not actually incurred or paying at levels that do not reflect the building’s true operating conditions.

    There is also a risk of double computation, which I covered in a previous post called “CAM Audits – Management Fees” in a section titled “The Gross-Up Trap.” If you have not read it, I would recommend going back to that one.

    New and Evolving Cost Categories

    This is one that is growing in importance. As buildings modernize, new expenses are being introduced: technology fees, sustainability initiatives, smart building systems, compliance-related costs. This can include items like building analytics platforms, energy management systems, ESG reporting costs, EV charging infrastructure, and new regulatory requirements.

    Without clear guidance in the lease, these costs can be introduced into reconciliations with limited visibility and little ability to validate or challenge them.

    This is especially critical in base year leases. When new categories are introduced after lease commencement, they can bypass the original base-year structure and create incremental costs that were never contemplated. If the lease does not clearly address how new expense categories are treated, the result is often a steady expansion of recoverable costs over time.

    And That Is Not the Full List

    Beyond these four, there are additional areas that create risk: management and administrative fee structures that get applied to inflated expense bases, utility and shared service allocations that lack clear methodology (especially in mixed-use environments), audit rights that exist on paper but are not practical to exercise, and timing requirements that limit your ability to review and respond. Each of these deserves its own focused discussion, and I will be touching on several of them in future posts.

    The point for now is this: each of these issues may seem small during negotiations. But over time, they compound. And by the time they surface in a reconciliation, the ability to address them is significantly limited.

    The Work That Prevents the Problem

    This brings me back to where I started. The most impactful lease administration work often happens before a reconciliation ever arrives. It happens when someone reviews the lease language with an operational lens, identifies where the gaps are, and flags them before the deal closes.

    That is the kind of work that does not always get measured, because the outcome is what did not happen. But it is where some of the greatest value in lease administration lives.

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  • CAM Audits – Management Fees

    CAM Audits – Management Fees

    It’s CAM and opex reconciliation season. The time of year when lease administrators are deep in spreadsheets, reviewing backup, and trying to confirm the charges are consistent with the lease.

    One area that causes confusion is management fees. They look simple and are often represented as just a percentage; however, they are also one of the most misunderstood and easiest places for errors to hide. Lease language and methodology are important, and small inconsistencies add up to real dollars over time.  

    Start with the Lease, Not the Math

    Before touching a calculator, go back to the lease. Management fee language is rarely consistent, and it often carries more nuance than it appears at first glance.

    A lease may reference a percentage of operating expenses, a fee tied to revenue, a fixed administrative charge, or even multiple layers of fees, such as property management and asset management. Some include caps, others do not. Some define the calculation base clearly; others leave room for interpretation.

    That’s where the risk sits.

    When a lease defines management fees based on “revenue,” that single word can carry multiple meanings. Is it gross revenue or net revenue? Is it total building revenue in a multi-tenant property, or only the tenant’s rent?   Those distinctions are rarely visible in a reconciliation summary, but they are critical in the lease.

    The same applies to operating expense-based fees. Many leases exclude specific categories such as taxes, insurance, capital expenditures, amortization, tenant improvements, or leasing commissions. If those exclusions are not properly removed from the calculation base, the management fee is already overstated before the percentage is even applied.

    It is entirely possible for the math to look correct on the surface while still not aligning with the intent of the lease.

    Lease Structure Impacts on Methodology

    It is critical to determine whether the lease is a base-year lease or a net lease.

    In a base year lease, tenants are responsible only for increases in operating expenses over a defined base year. That means the analysis is not about the total expense, but instead about the change. Management fees are not automatically fully recoverable each year, and their treatment must be consistent between the base year and subsequent periods.

    In a net lease, tenants typically pay their proportionate share of operating expenses each year. The question becomes whether the management fee meets the lease definition and is calculated correctly.

    This distinction matters because it changes how errors show up. In base-year leases, issues often arise from inconsistencies between periods. In net leases, they tend to come from over-inclusion or incorrect calculation bases. 

    I have seen management fees calculated on “gross building revenue” per the lease, but use estimated operating expense billings as part of the revenue instead of actual allowable operating expenses to arrive at that number. Depending on how those estimates are trued up, the result can swing in the tenant’s favor or against it, but either way, the methodology is wrong.

    The Gross-Up Trap

    Gross-up provisions add another layer of complexity to base year leases, especially when combined with management fees. Operating expenses are often grossed up to reflect full occupancy, which is intended to normalize costs and create comparability. Where things start to get convoluted is how management fees are calculated from those adjusted numbers. 

    In some cases, operating expenses are first grossed up to a stabilized level, and the management fee is then calculated on those grossed-up expenses rather than actual costs. This is where lease language and interpretation matter. It becomes even more complicated when the management fee itself is then also grossed up. The expenses are adjusted through gross-up, a fee is calculated on those adjusted amounts, and that fee is then increased again through the same gross-up methodology. In effect, the same adjustment is being applied more than once to the same economic activity.

    Gross-ups are intended to normalize variable expenses so tenants are not impacted by vacancy, not to increase fixed or semi-fixed costs multiple times. When a management fee is calculated on already grossed-up expenses and then grossed up again, the result is an inflated cost that likely does not align with the lease or the intent of the provision. The percentage may be correct, and the math may even appear internally consistent, but the methodology is not.

    This type of issue is rarely obvious on the surface. Instead, it often appears as a management fee that seems higher than expected, gross-up applied broadly without clarity around what is included, or a lack of transparency in how the calculation was built. The only way to identify it is to break the calculation apart and follow the order of operations step by step. This is exactly the kind of issue that calls for a Lease Police mindset.

    Don’t Audit in the Dark: Request the Methodology and Backup

    One of the most important steps in reviewing management fees is also one of the most overlooked. Request the calculations and methodology.  Do not rely on summary numbers alone. Ask for the management fee calculation worksheet, the defined expense base, and the detailed backup supporting it. Understand what was included, what was excluded, and how the numbers were built.

    If gross-up is involved, ask how it was applied. If multiple management-related charges appear, ask how they differ. If a cap exists, confirm how it was enforced. If you cannot clearly walk through the calculation, that is a signal to slow down and take a closer look. This can take several requests to the landlord to peel back the layers. Lease administrators are not just reviewing numbers; they are validating the methodology and comparing it against the lease terms. 

    How AI Can Support the Review Process (Using Enterprise LLMs)

    During reconciliation season, volume is high and time is limited. This is where AI can be a valuable tool, particularly when using enterprise-grade large language models (LLMs) designed to protect sensitive data.

    Unlike public tools, enterprise LLM environments are typically configured with:

    • Data privacy controls
    • No training on your company’s inputs
    • Secure document handling
    • Integration with internal systems

    That makes them more appropriate for reviewing leases, reconciliations, and supporting financial data within a controlled environment.

    In practice, AI can help lease administrators quickly extract key lease provisions, identify exclusions and caps, compare base-year and current-year expense groupings, and flag inconsistencies in how calculations are applied. 

    Prompts will vary from lease to lease, but you might use prompts like:

    “Review the lease and amendments and summarize management fee provisions, including percentage, caps, exclusions, and calculation base. Provide relevant lease sections.” 

    “Now review and analyze this CAM reconciliation and prior year CAM reconciliations, and make observations about how the management fee was calculated.  Identify areas that need more investigation.”

    “Compare the base year and current year expense schedules and identify inconsistencies in categories, gross-up methodology, or management fee treatment.”

    “Review this calculation and determine whether management fees are being calculated on grossed-up expenses and whether those fees are also included in the gross-up pool.”

    These tools can help reduce the time required to identify issues and prepare audit questions.

    But they do not replace judgment. Lease interpretation still requires experience, context, and an understanding of how contract language translates into financial outcomes. Always read the relevant lease sections and validate. Always confirm your company’s policies before uploading documents or any company information into an LLM.

    Management fees are often treated as routine. But they are anything but routine. 

    What management fee issues have you come across, or how are you using AI to support your reconciliation reviews?

  • Lease Police: Investigation, Enforcement, and Protecting the Portfolio

    Lease Police: Investigation, Enforcement, and Protecting the Portfolio

    Before working in corporate real estate, I started my career in law enforcement. As a police officer, your work depends on critical thinking, investigation, and evidence. You gather facts carefully. You understand the law and read and interpret it. You compile complex information into clear, defensible documentation that allows others to depend on and act on your work. When disputes arise, you use communication, situational awareness, and conflict-resolution skills to defuse the situation and guide conversations toward practical resolution.

    Years later, when I transitioned into commercial and corporate real estate, I realized something surprising. Many of the same skills applied.

    Lease administration, at its core, is investigative work.

    Anyone who has spent time in lease administration knows this feeling.

    Every lease must be interpreted and abstracted. Each lease is uniquely different. Rent statements, escalations, and reconciliations require evaluation against the specific lease language. Conflicting information must be reconciled. Documentation must be clear and defensible. And when disputes arise, success often depends on facts, communication, and sound reasoning.

    But the work is not only investigative. In many ways, it is also an enforcement role.

    Lease administration helps ensure that parties operate within the terms of the contract. Charges are reviewed against what the lease specifically allows or disallows. Escalations are verified. When discrepancies appear, the responsibility is to raise the question, go back to the documentation, and adhere to the terms of the agreement.

    Sometimes that simply means  “This doesn’t look right. Let’s go back to the lease.”

    Proactivity in lease administration follows the same theory as crime prevention. When this work is done well, the result is often measured by what did not happen. It is the issue that never escalates, the internal audit finding that neverappears, and the cost that never reaches the balance sheet or P&L.

    This connection is what inspired the concept of Lease Police.

    The term is meant somewhat playfully, but the idea behind it is serious. Lease administration plays a critical role in protecting organizations from financial and compliance risk. It requires attention to detail, strong documentation, and the confidence to challenge numbers or interpretations that do not align with the lease. It also requires communication and conflict-resolution skills that help navigate landlord discussions, resolve disputes, and support lease negotiations. 

    If you work in lease administration, you know exactly what this feels like.

    You also know that companies and portfolios of all sizes face many of the same challenges, just on a different scale. Incomplete data. Dependencies. Late documentation. Where is the document repository? What is the source of truth? Complex lease language that can be interpreted three different ways depending on who is reading it. System limitations. Systems that do not communicate with each other. Tight deadlines. And the ongoing balance between operational realities and accounting and NIBT compliance.

    If you have ever spent an afternoon tracing an issue back through a lease, amendments, email communications, spreadsheets, or invoices just to find the “smoking gun,” you are the Lease Police.

    This blog is dedicated to sharing ideas, best practices, and the real situations that lease administrators deal with every day. The goal is to create a place where we can compare notes, share experiences, ask questions, and exchange perspectives. You are encouraged to contribute your insights because some of the best solutions will come from this community.

    Regular blog posts will explore common challenges across the lease lifecycle, including reviewing operating expenses and reconciliations, identifying overcharges, improving lease data quality, addressing international and currency challenges, navigating lease accounting requirements, and strengthening internal controls and interdepartmental collaboration.

    They will also include training resources and insights about what is happening in the industry, from evolving accounting standards and reporting expectations to emerging technologies. This includes exploring how tools such as AI and intelligent data assistants may help lease professionals analyze information, surface issues more quickly, and support stronger oversight of lease portfolios.

    Lease administration often happens behind the scenes, but when it is done well it protects organizations from risk, supports better operational decisions, and helps control occupancy costs.

    Welcome to the Lease Police blog.