Forensic accounting gets new “lease” on life

Detailed audits help landlords determine what portion of costs can be passed on to tenants

Thomas Woodward
Thomas Woodward

The economic downturn and housing crunch have resulted in landlords trying to save dollars wherever they can, and this has meant a rise of forensic lease audit work for accountants, the New York Observer reported.

Though the majority of disputes over things such as tenants’ responsibility for repair and building upkeep tend to be decided in out-of-court settlements, there is often significant money involved. “In one instance, I actually recovered $1.9 million for a tenant,” Thomas Woodward, director of real estate advisory services at Holtz Rubenstein Reminick LLP, told the Observer. “It’s not unusual for me to come up with a million here and a million there.” 

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Forensic reviews, Woodward said, tend to be far more granular than the typical desktop audit, and drill down into the details of a lease term or capital improvements. The decisive factor tends to be whether an expense is a capital improvement or a repair; capital improvement costs tend to fall on the landlord, while costs of a repair can often be passed on to the tenant. In the case where a capital improvement — such as renovating an elevator — prevents the need for repair work, the audit can help gauge how the costs will be split.

“You don’t want the landlord to be penalized,” Woodward told the Observer. But the tenant should be charged “only for the amount of repair that has been eliminated by doing the capital improvement.”

Savvier landlords have learned how to predict what issues may come up, and draft the leases accordingly, Berdon LLP’s Seth Molod, told the Observer. “Sometimes there are legitimate gray areas. Those positions can usually be worked out.” [NYO]  —Hiten Samtani