Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Use Lease Audits to Recover Hidden Costs
Transcript
- Lucas: You know, I was talking to a franchisee who runs ten quick-service restaurants in Ohio. He told me he recently did something that most franchisees never think about — and it put forty-seven thousand dollars back in his pocket. Luna: Forty-seven thousand? From what, renegotiating his credit card processing fees? Lucas: Not quite. He did a lease audit. And he only audited three of his ten locations. The recoveries came from overcharges that had been quietly accumulating for years. Luna: Okay, I need to know more. I think most franchisees assume their lease is a fixed cost — you sign it, you pay it, done. Lucas: Right, and that's exactly the assumption that costs them. Commercial leases, especially in retail and quick-service, are incredibly complex documents. They include pass-through charges like common area maintenance — CAM — real estate taxes, insurance, and often management fees. And landlords make mistakes. Luna: Mistakes that favor them, I'm guessing. Lucas: Almost always. A study by a firm called Lease Audit Partners found that about eighty percent of commercial leases contain errors in the landlord's favor. The average overcharge per location? Somewhere between three and eight thousand dollars a year. Luna: So that Ohio franchisee's recovery of forty-seven thousand on three stores — that's probably multiple years of overcharges combined. Lucas: Exactly. He went back three years, which is typically the limit under the statute of limitations in most states. And the biggest chunk came from CAM charges — common area maintenance. Luna: CAM is always the fuzzy area. Landlords bill for snow removal, landscaping, parking lot repairs, property management salaries. How do you even verify that? Lucas: You request the actual invoices and a breakdown of how they allocated costs among tenants. In this case, the landlord was charging a flat per square foot CAM rate that included costs for capital improvements — things like resurfacing the parking lot. Under most leases, capital improvements are supposed to be amortized over their useful life, not fully passed through in one year. Luna: So the landlord was essentially front-loading the cost. That's a classic error. Lucas: It is. Another one — double-dipped insurance. The landlord charged each tenant for the property insurance premium, but also had a line item for 'insurance administration fee.' That's basically charging you to handle the insurance you already paid for. Luna: And those fees are often buried in the annual reconciliation statement. Most franchisees just pay it without looking. Lucas: That's the norm. The audit itself cost him about three thousand dollars — he hired a specialist firm. So the return was roughly fifteen to one. Even if he'd found nothing, it would have been cheap insurance. Luna: And now he's auditing the other seven stores, I assume. Lucas: He is. But the key point is this: lease audits aren't just for big multi-unit operators. A single-unit franchisee with a five-year lease could recover enough to cover a month's rent. Luna: What are the most common triggers? What should a franchisee look for in their lease before they even hire an auditor? Lucas: Three things. First, the base year for CAM and taxes. Many leases use a 'base year' — say, the first year of the lease. But if the base year is grossed up to assume full occupancy, and the building wasn't full, you're overpaying from day one. Luna: Right — the gross-up provision. The landlord estimates what CAM would be if the building were ninety-five percent occupied, even if it's only sixty percent occupied. That inflates your base year, and then every year after that your share is higher. Lucas: Exactly. Second, look for 'management fees.' Some landlords charge a percentage of CAM costs as a management fee — often five to ten percent. But many leases already include property management in the CAM itself. That's double-dipping. Luna: And third? Lucas: Rent escalation clauses. If your lease has a fixed annual increase — say three percent — check that the math is applied to the base rent, not some inflated figure. Also, if the escalation is tied to CPI, verify that the index used matches what's in the lease. Landlords sometimes use a different index by mistake. Luna: So it's a combination of clause language and actual billing verification. Lucas: Right. And the statute of limitations is critical. Most leases say you have twelve months from receiving the annual reconciliation statement to challenge it. But many franchisees don't keep those statements. So the first step is simply gathering every statement and invoice they have. Luna: That alone can be a project. But the payoff is real. I've heard of franchisees recovering enough to fund a whole new piece of equipment. Lucas: Yeah — or in the case of the Ohio franchisee, that forty-seven thousand covered his rent for two months across all ten stores. It's essentially found money. Luna: And it's something any franchisee can do — they don't need the landlord's permission, they just need to request the backup documentation. Lucas: Exactly. Most states allow tenants to audit their landlord's records. If the landlord refuses, you may have grounds for a dispute. But in practice, most landlords will cooperate because they'd rather settle than have a courtroom interpret the lease. Luna: That's a good point. Also, if you're in the middle of a lease renewal, an audit can give you leverage. If you find overcharges, you can negotiate a credit or a lower base going forward. Lucas: Absolutely. And that's where the strategy gets interesting. Some franchisees use the audit to push for a 'reset' on the base year — essentially starting fresh with a fair CAM base. Luna: I want to circle back to something. You mentioned hiring a specialist. What should a franchisee look for in an audit firm? Lucas: Experience with retail leases specifically. Many real estate audit firms focus on office space — different rules. Look for someone who has worked with franchise systems. Also, they should work on contingency or a flat fee. Contingency is usually thirty to fifty percent of whatever they recover. That aligns incentives. Luna: And if they find nothing, you pay nothing. That's a pretty easy sell. Lucas: Right. And even if they find nothing, you've at least done your due diligence. But the data suggests you're very likely to find something. So it's one of those rare business moves with asymmetric upside. Luna: Speaking of asymmetric upside — you know, these conversations we have every week, they take a lot of research and preparation. And we keep them ad-free because we believe in just putting useful information out there. Lucas: Yeah, it's important to us that the show stays independent. And the way that works is listeners who find value in it occasionally toss a few dollars our way. It's not a big ask — a couple of dollars a month genuinely makes a difference. Luna: Exactly. If you've ever implemented something you heard here, or even just saved yourself a headache, that's what keeps us going. You can find us at buy me a coffee dot com slash fexingo. Lucas: And we really do read every message that comes with it. It's motivating to know what's working for people. So, back to lease audits — one more thing I want to mention. Luna: What's that? Lucas: The timing. The best time to audit is right after you receive your annual CAM reconciliation. That's when the clock starts ticking on the dispute window. If you wait six months, you might lose the right to challenge that year. Luna: So really, the first step is just calendar management. Mark the date you receive the annual statement, and then schedule a review within thirty days. Lucas: Exactly. And if you're a multi-unit operator, do one store first as a pilot. If the results are good, roll it out across the rest. That's exactly what the Ohio guy did. Luna: And that forty-seven thousand dollars probably felt a lot better than any sales promotion he ran that quarter. Lucas: No contest. It's profit straight to the bottom line. And that's really the takeaway — your lease isn't a fixed cost. It's a variable cost you can audit, challenge, and improve.