Auditing the utility pass-through charges in a triple-net lease for a medical office tenant in suburban Philadelphia. The landlord passes through utility costs based on the tenant's proportional share of the building's square footage — 35% in this case. But the landlord is calculating 35% of the TOTAL building utility bill which includes common area lighting, elevator power, and the landlord's own office suite. The lease says the tenant pays 35% of "tenant-proportional utility costs" which should exclude the landlord's own usage. The overcharge is about $1,400/month — 23% more than the tenant should be paying.
Triple-net lease audit — landlord overcharging by 23%
Lease pass-through audits are a goldmine because nobody ever checks the math. The landlord calculates the pass-through, the tenant pays it, and nobody questions whether the calculation matches the lease terms. I've found errors on about 70% of the lease pass-throughs I've audited. The most common: including charges that the lease excludes, using the wrong allocation percentage, and applying the percentage to the wrong base amount.
This is an excellent niche within utility bill auditing. The audit requires two documents: the utility bill and the lease. Compare what the lease says the tenant should pay to what the landlord is actually charging. The discrepancies are almost always in the landlord's favor — not necessarily intentionally, but because the person calculating the pass-through may not have read the lease carefully. Phil, make sure to check whether the lease allows for an audit of the pass-through charges. Most commercial leases have an audit clause that gives the tenant the right to inspect the landlord's utility records.
Lease does have an audit clause. Presented findings to the landlord's property manager and they corrected the calculation immediately. Refund of $33,600 going back 2 years plus corrected pass-through going forward. The tenant was thrilled.
Love lease pass-through audits. Low effort, high hit rate. Nice find Phil.