I'm auditing utility expenses for a major tenant in a shopping center in Phoenix. The lease says utilities are passed through at 'actual cost' but I'm finding several charges on the landlord's Arizona Public Service bill that seem questionable. There's a $340/month 'property management fee' added to the electric bill and the demand charges are being allocated based on square footage rather than actual usage. The tenant is paying about 35% of total utility costs for 28% of the space. Any advice on challenging lease pass-through calculations?
Lease pass-through audit for shopping center tenant
Lease pass-through audits can be contentious! First, get copies of the actual utility bills and the lease language defining 'actual cost.' The $340/month management fee probably isn't allowable unless specifically mentioned in the lease. For demand charge allocation, you'll need to argue that square footage doesn't accurately reflect electrical demand - especially if the tenant has different operating hours or equipment than other tenants. Document any HVAC, lighting, or equipment differences that would affect demand usage patterns.
This is a common issue with retail lease pass-throughs. The key phrase 'actual cost' typically means only the utility charges, not administrative fees. I'd challenge both the $340/month management fee and the allocation methodology. For demand charges, if your tenant has significantly different electrical loads (heavy equipment, extended hours, etc.), you should push for allocation based on actual metered usage or connected load rather than square footage. Consider proposing submetering as a solution - many landlords will agree to this to avoid ongoing disputes. You might recover $200-400/month in improper charges.