Given the current real estate environment, property owners are focused on minimizing their operating expenses, optimizing revenues and maintaining occupancy. These are times when a trusted advisor can be a valuable asset. A good CPA is always looking for ways to help their clients stay profitable, providing services such as cash flow projections, analysis of tenant leasing strategies, income tax planning, etc. One real estate service that is particularly relevant right now is percentage rent sales audits (see article in this issue). These are all ways in which a CPA can be both watchdog and advocate for your business.

Are you confident that you are doing all you can to make each dollar count right now? If not, talk to your CPA about how he/she can help.

Don Greenhalgh, Partner 781-937-5339 dgreenhalgh@dgccpa.com

Could Your Tenant(s) Be Underreporting Sales to Reduce Rent?
by Keith Lanzillo, CPA

These days, retail property owners are doing whatever they can to keep tenants. Many are offering attractive leasing options, some of which include percentage rent payments. Unfortunately, some tenants may be tempted to underreport sales in order to reduce or eliminate percentage rent payments. If you suspect a tenant is underreporting sales, you may want to consider a percentage rent sales audit.

Most leases include terms within the percentage rent clause that allow owners of property to audit tenant sales which are reported to them. Companies with tenants who pay percentage rents are susceptible to underreporting of sales, which could potentially result in a significant underreporting of rent due. For example, a tenant reports $4,000,000 of sales for the year to the property owners, the breakpoint per the lease agreement is $2,000,000 and the percentage rent sales factor is five percent. This would result in percentage rents due of $100,000. If an audit were conducted and revealed an additional $500,000 in unreported sales, an additional $25,000 in rent would be due.

Some signs that a tenant may be underreporting sales include:

• A publication or report indicates that your national retail tenant has had a very good year and sales are up from the prior year, but your franchise tenant has reported that their sales are down.
• Based on market analysis or even conversation with a tenant, you expect sales to be up by a certain percentage from the prior year. Instead, they report sales are only up by a fraction.
• Your tenant operates in a business sector that isn’t necessarily affected by the recession, but they report a decrease in sales from the prior year.

If any of these scenarios sound familiar, you may want to consider a percentage rent sales audit. A percentage rent sales audit requires very little work on the part of the property’s management team. Most of the work is required to be performed by the tenant. The audit team would test the tenant’s sales reports by sampling and reviewing cash register receipts, batch totals, bank deposit slips, bank statements, annual tax returns, and sales/meals tax returns. At the conclusion of the audit, an Agreed Upon Procedures report could be issued to communicate the audit findings. The percentage rent clause of the lease may also call for reimbursement from the tenant for audit fees if a stipulated percentage of underreported sales are found.

If you suspect a tenant may be underreporting sales and/or would like more details about a percentage rent sales audit, contact Keith Lanzillo at 781-937-5338 or klanzillo@dgccpa.com.

Helping Nonprofits Help Themselves: DGC’s Pro Bono Assistance Program
In the spirit of Nonprofit Awareness Day, which took place on June 8, DGC launched a pro bono program to assist nonprofit organizations with their accounting and financial service needs. These are tough times all around, but nonprofit organizations are being hit particularly hard. As a CPA firm, the best way we know how to help is by offering accounting assistance and consulting. To date, several organizations have taken advantage of our pro bono program. Two of which are showcased here:

• Facing Cancer Together is an organization that provides support services and education for cancer patients. Based in Newtonville, MA, the organization is committed to enhancing quality of life for both patients and their loved ones. According to Joyce Collier of Facing Cancer Together, DGC assisted them with their application for tax exempt status and consulted with them on the myriad of compliance requirements that nonprofit organizations are subject to. DGC staff offered guidance on the format of donation letters. They also worked with the organization to develop an operational budget and advised them on best practices related to the governance of the organization.
  
  
• Boston Debate League is an education initiative targeted at high school students that combines competition, fun and learning. By offering a wide range of activities, the program appeals to high achievers as well as those who may be at risk of dropping out. According to Steve Stein, Executive Director of Boston Debate League, DGC educated the organization on accounting best practices. With help from DGC, they were able to establish a budgeting system which they can use on their own going forward. DGC staff also helped them understand the complex financial rules and regulations a nonprofit must manage.

Most of the nonprofit organizations taking advantage of this program have been startups that don’t have accounting support in place or the money to do so. “It’s tough for these organizations,” says Todd Ellis, CPA, who heads up the nonprofit group at DGC. “They have to comply with ever changing government regulations and scrutiny which requires a certain level of expertise in the nonprofit industry. That’s what we bring to the table. As a result, I think we are able to provide a service that ultimately allows them to execute their mission and serve their constituents more effectively.”

Do you know a nonprofit organization that could benefit from this program? Contact Kathy Charles at kcharles@dgccpa.com to request an application.

Kidnap and Ransom Insurance: When Advisors Go Above and Beyond
by Gary Pasternack, Principal and Director of Property & Casualty Advisory for Bessemer Trust

Kidnap-for-ransom, which occurs in many countries around the world, regularly makes headlines in today’s news. Most recently, we have witnessed the rise in piracy in certain maritime areas. However, there are also political groups who kidnap for profit to fund their organizations, as well as drug trafficking groups and organized crime syndicates for whom kidnapping is a business.

Most kidnappings in the United States are usually not “stranger” kidnappings. So, the incidence of kidnap-for-ransom in this sense is fairly low in our country. That is not the case elsewhere, as illustrated by this list of top ten countries per number of kidnaps*:

When people travel abroad, they are more likely to encounter higher levels of incidents. Mexico, for example, is notorious for its kidnapping industry. Meanwhile, closer to home, these are statistics a family office and/or other advisors should be aware of as it pertains to their high net worth clients.

Who is at risk?
High net worth and/or high profile individuals are most likely to be targeted. According to the 2008 Annual Kidnap Review published by Special Contingency Risks of London, the most common types of victims include: journalists, government officials and security forces, business personnel, tourists, aid workers, religious staff and sports and media personalities. However, anyone travelling abroad in high-risk countries can be putting themselves in danger. At the same time, that individual is not always the intended victim. Kidnappers may target their family instead. Employees of large corporations who are working abroad may also be at risk.

What does a kidnap and ransom policy cover?
Since this type of policy is generally obtained by those who have financial means and wealth, the ransom itself is not the only reason for obtaining an insurance policy. What most people are really purchasing is security—in the most literal sense. Insurance companies that offer this type of coverage retain security firms with tremendous expertise in the area of kidnappings, negotiations, and even preventive services. These are highly trained professionals (military, FBI, etc.) with experience in these types of situations, who can be called upon to bring relatives and loved ones home safely.

Of course, there are other elements of the coverage and limits of insurance to consider. Each policy can be tailored to meet specific circumstances. The following are specific policy elements the insured may want to consider:

• Ransom: These are policies of indemnity, which means that the insured individual or the family of the insured person pays the kidnap ransom and is then reimbursed by the insurance company. There is good reason for this. It reduces the likelihood of people simply “disappearing” and getting paid by insurance companies.
• Theft of ransom: This covers the ransom “in transit.” If the money should disappear and never actually get delivered to the kidnappers, there is coverage for that.
• Interest: Let's say that the insured is not liquid, their funds are tied up and they are going to need to borrow money in order to pay the ransom. The policy may include interest payments on those funds separate from the ransom payment.
• Medical expenses: Once a kidnap victim is released, the policy will pay for medical expenses and psychiatric expenses for a specified period of time after the kidnapping.
• Personal financial loss payments: This covers the gross salary, bonuses, commissions, cost of living adjustments, foreign tax reimbursements, pensions, etc. in the event the insured is unable to work during the course of an incident.
• Miscellaneous expenses: This is kind of a “catch all” category to allow for any other reasonable fees and expenses that are related to the kidnapping.

Advice from an Insurance Professional
When considering this type of insurance coverage, obtain a policy that has broad coverage, including the items mentioned above. In these types of situations, any number of expenses may come into play. Make sure the insured is covered for anything that could come up during an incident.

Similarly, the definition of who is covered should be intentionally broad to include:

• Spouse, fianc�e or domestic partner
• Immediate family - including step parents, step children, step siblings, foster children, adopted children, adopted parents, spouses thereof of either an insured person or the spouse of an insured person
• Lineal descendent, living ancestor or relative – covering both sides of the family (maternal and paternal)

In addition, guests in a home and/or domestic employees should be included in the policy. If there are people who are normally in the residence, even if they aren’t related to the insured, they should be covered. In fact, anyone who is at risk can be specifically named as a covered person in the policy.

Conclusion
This isn’t the typical conversation an insurance agent has with a client. It is a sensitive topic because it revolves around personal safety, and it takes someone who is intimately familiar with the family to understand their lifestyle, potential dangers they might be exposed to, and what type of coverage the individual and/or family might need. Often the family office or a wealth manager is in the best position to advise their clients on such matters, or at least initiate the conversation to address a potentially dangerous situation.

Good advisors are ones who truly look out for a client’s best interest. Whether it is a CPA taking a proactive approach to tax planning or a financial planner performing due diligence on a new investment vehicle, high net worth clients depend on our expertise and foresight. Trusted advisors may need to go above and beyond, especially when a client’s personal safety is at stake.

About the Author Gary Pasternack is Principal and Director of Property & Casualty Advisory for Bessemer Trust in New York. A former member of J.P. Morgan & Co.’s Insurance and Risk Management Department, he specialized in designing and managing insurance programs for families, individuals, trusts and estates. He can be reached at 212-651-1178 or Pasternack@bessemer.com.

August 13 – Small Business Assoc. of New England (SBANE) - After Hours Summer Networking
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