Brownfield & Mayerhofer, Inc.

“Deem It!”

Addressing a Tenant Auditor’s Flawed Report

Our Client: The Property Manager

Summary

A national tenant engaged a contingency auditor to review operating expense escalations. The auditor was not a CPA. Among other things, the auditor’s report asserted that the lease was silent on the issue of “deeming,” which is another term for “grossing up” variable expenses, and therefore concluded that the tenant’s base year and subsequent years’ expenses should not have been grossed up. The property manager was able to deal with the majority of issues outlined in their report. He contacted us to research the deeming issue and asked for our opinion and recommendations.

Our Contribution

We reviewed the auditor’s report and the tenant’s lease document. We determined that deeming was permitted under the lease as a “standard accounting practice” and assisted the property manager in preparing a written response to the tenant and to their auditor. A key issue the property manager was able to communicate to the tenant’s local representative was the dual benefit of the gross-up process. On one hand, grossing up the Base Year protects the interests of the tenant. On the other hand, grossing up subsequent years’ variable expenses protects the interests of the property owner.

Conclusion

The tenant accepted the property manager’s explanations. After the property manager made a small credit adjustment, the tenant paid all outstanding escalation charges.