Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Use Lease Audits to Recover Thousands
Transcript
- Lucas: So I was talking to a franchisee last week who operates five quick-service locations in the Midwest, and he mentioned something that stopped me cold. Luna: What was it? Lucas: He said, 'I just found forty-seven thousand dollars in overcharges across my leases. And I never would have caught it if I hadn't run a lease audit.' Forty-seven thousand dollars. That's real money for a franchisee. Luna: That's wild. What kind of overcharges are we talking about? Lucas: Mix of things. Common area maintenance charges — CAM — that were calculated incorrectly, base rent escalations that were applied at the wrong percentage, and one location where the landlord was charging him for square footage that didn't exist. Luna: Square footage that didn't exist? How does that happen? Lucas: It's more common than you'd think. When you sign a lease, the landlord provides a square footage figure. But if you actually measure the space — and I mean physically measure it — it's often smaller. One study I saw from a commercial real estate consultancy found that about thirty percent of retail leases have square footage discrepancies of two percent or more. And since rent, CAM, and taxes are all tied to square footage, those errors compound. Luna: So the franchisee in your story, was it a professional audit or did he do it himself? Lucas: He used a third-party lease audit firm. Cost him about three thousand dollars for the five locations. They took a contingency fee on the back end — twenty-five percent of whatever they recovered. So he netted about thirty-five thousand after fees. Not bad for a few weeks of paperwork. Luna: That's a twelve-to-one return. Why don't more franchisees do this? Lucas: I think it's two things. First, most franchisees assume their lease is a fixed cost — they sign it, they pay it, end of story. Second, the lease document itself is intimidating. It's fifty pages of legalese, and the average operator doesn't have time to parse every CAM reconciliation statement. Luna: And the franchisor isn't exactly incentivized to help. Most franchise systems have their own real estate teams that negotiate the lease, but they're focused on getting the deal done, not auditing it afterward. Lucas: Exactly. And some franchisors actually have clauses that limit your ability to audit. I've seen leases that say you have to object to CAM charges within sixty days of receiving the statement, or you waive your right to dispute them. If you're not reading every line, you're leaving money on the table. Luna: That sixty-day window is brutal. Most operators are so busy running the business that they just file the paperwork. Lucas: Right. So let's break down what a lease audit actually looks at. The big categories are CAM charges, base rent escalations, real estate taxes, and square footage. CAM is the most fertile ground because it's the most opaque. Luna: What are landlords typically padding in CAM? Lucas: All kinds of things. I've seen management fees that are calculated as a percentage of total CAM, which is normal, but then the landlord also includes their own salaries in CAM. Double-dipping. Or they charge for capital improvements — roof replacements, parking lot repaving — which should be amortized over the useful life, not expensed in one year. Some leases explicitly prohibit that, but landlords do it anyway. Luna: And the franchisee has to catch it. Lucas: Or hire someone who will. The good audit firms know exactly where to look. They'll pull the landlord's general ledger, compare it to the lease terms, and flag any charge that doesn't match. In the case I mentioned, the landlord was charging a flat fifteen percent management fee on top of CAM, but the lease said twelve percent. That alone was a six-thousand-dollar error over two years. Luna: So it's not just about catching fraud. It's about enforcing the contract you already signed. Lucas: Exactly. And this isn't exclusive to big multi-unit operators. A single-unit franchisee can recover meaningful money too. I read about a sandwich shop owner in Ohio who found eight thousand dollars in overcharges on a single lease. That's a month of payroll. Luna: Okay, so say I'm a franchisee and I want to run an audit. What's the first step? Lucas: First, pull your lease and all your CAM reconciliation statements — you want at least three years of history. Then check if your lease has an audit clause. Most commercial leases give you the right to audit the landlord's books, but the terms vary. Some say you can only audit once a year, others say you need to give thirty days notice, a few specifically prohibit audits. Luna: Wait, some leases prohibit audits entirely? Lucas: Yes. I've seen it. It's usually in smaller retail spaces where the landlord has all the leverage. If you sign one of those, you're basically trusting the landlord's numbers. But even then, you can sometimes negotiate an audit clause in the renewal. Luna: So the best time to get an audit clause is before you sign. Lucas: Ideally, yes. But if you're already in a lease without one, you still have options. You can request detailed backup for CAM charges — invoices, receipts — and if the landlord refuses, that's a red flag. Some states have laws that require landlords to provide reasonable documentation. Luna: And if you find errors, what happens next? Lucas: You present your findings to the landlord. Most will negotiate a settlement to avoid litigation. In the case of the forty-seven-thousand-dollar recovery, the landlord cut a check within sixty days. They didn't want to go to court over a few thousand dollars per location. Luna: But what if they push back? Lucas: Then you escalate. You can file a complaint in small claims court or, if the amount is large enough, hire a real estate attorney. But honestly, most audits settle because the landlord knows they're in the wrong. The errors are usually sloppy bookkeeping, not intentional fraud. Once you point it out, they correct it. Luna: And the franchisee's relationship with the landlord? Doesn't that get strained? Lucas: It can, but smart franchisees frame it as a partnership. 'Hey, we both want accurate books. Let's fix this going forward.' Most landlords appreciate a tenant who pays attention. It means fewer problems down the road. Luna: So if I'm a franchisee listening, what's the one thing I should do this week? Lucas: Pull your CAM reconciliation for the last twelve months. Compare the charges to your lease. Look for line items like 'management fee' and 'administrative fee' — those are often miscalculated. If something looks off, hire a specialist. A three-thousand-dollar investment could pay for itself ten times over. Luna: And if you're not sure where to start, there are firms that offer free initial reviews. They'll look at your lease and CAM statement and tell you if there's potential. Lucas: Yeah. And honestly, even if you don't find anything, the peace of mind is worth it. You're not leaving money on the table. Luna: This is exactly the kind of practical stuff that makes a real difference in a franchisee's bottom line. And it's why conversations like this matter. Lucas: If these conversations have moved your work forward in some small way, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it's a small gesture that adds up fast. Keeps us ad-free and focused on the stuff that actually helps. Lucas: So, on that note, let's talk about another angle of lease management — how to renegotiate your lease before the term ends. Luna: I thought you had to wait until renewal? Lucas: Not necessarily. If you've been a good tenant — paying on time, no complaints — you have leverage. You can approach the landlord six to twelve months before your lease expires and say, 'I want to stay, but here's what the market looks like.' If vacancy rates in your area are high, you might get a rent reduction or a tenant improvement allowance. Luna: And that's where having the audit data helps. You can show that you know the numbers. Lucas: Exactly. When you walk in with a lease audit showing you caught errors, the landlord knows you're not a pushover. That strengthens your negotiating position. Luna: So lease audits aren't just about recovering past overcharges. They're a tool for better future terms. Lucas: Right. It's a total shift in mindset — from 'rent is a fixed cost I have to pay' to 'rent is a variable cost I can optimize.' And for franchisees operating on thin margins, that optimization can be the difference between profit and loss. Luna: And the nice part is, you don't need to be a real estate expert. You just need the willingness to look. Lucas: Or the willingness to pay someone else to look. Either way, it's worth it.