Dewberry Capital – Costs Charged to Commercial Tenant Upheld in Arbitration

Challenge

Dewberry Capital is one of the largest owners of Peachtree Street real estate in Atlanta. Georgia’s Own Credit Union (GOCU), a tenant at Dewberry’s 20-story Campanile building in Midtown Atlanta, sued Dewberry, accusing it of fraud and overbilling it for its share of operating expenses at Campanile. The suit followed a lease audit performed by Cushman & Wakefield for GOCU, which concluded that Dewberry had overbilled GOCU for more than $1 million a year for three years by using improper methods for calculating GOCU’s share of operating expenses, primarily ad valorem real estate taxes. Campanile benefits from a development authority tax abatement that lowers its tax payment. Campanile also is not fully occupied; therefore, under the lease terms, Dewberry “equitably adjusts” or “grosses up” variable operating expenses, including taxes, which are passed through to its tenants as if the building were 95 percent occupied. GOCU’s suit claimed Dewberry’s methodology resulted in “fabricated tax expenses.”.

Approach

Arnall Golden Gregory’s strategy was to aggressively attack the Cushman & Wakefield report and the author of the lease audit. The report lacked obvious foundation and the author lacked clear qualifications to testify about proper tax pass-throughs. However, GOCU was relying solely on that report and the author’s testimony to try to prove its fraud and tax overcharge claims. Dewberry’s experts testified that Dewberry had, in fact, undercharged GOCU according to industry standards and guidelines published by the Building Owners Management Association. Dewberry’s vice president of real estate gave extensive testimony about her methodology in calculating the operating expenses, which Dewberry’s experts confirmed was proper. The arbitration discovery process was unusually active, with each side taking numerous depositions from corporate representatives, experts, former employees and other witnesses. Prior to the final hearing, and with Dewberry’s motion for summary judgment pending, GOCU dismissed its fraud claim. Dewberry also brought a counterclaim against GOCU for underpayment of certain operating expenses, arguing that industry standards allowed higher charges for taxes.

Result

The final hearing lasted one week, but Dewberry prevailed on GOCU’s tax claim midway through. First, the arbitrator ruled that the lease audit author was not qualified to testify regarding the tax issues. The arbitrator then granted a directed verdict on GOCU’s tax overpayment claim after GOCU rested its case; awarded Dewberry $216,056 on its counterclaim and ruled that GOCU’s fraud claim was frivolous; ordered GOCU to pay Dewberry’s legal fees; and, importantly, ruled that the methodology used to calculate operating expenses was correct. Therefore, Dewberry can continue to use that methodology to pass through the tax expenses for the remainder of GOCU’s lease term.