Companies spend a significant amount of time and money negotiating their real estate leases. Whether you are in your company’s finance, legal, procurement, or real estate department, you have likely worked with your company’s real estate leases. Once a lease is signed, effort shifts from the transaction to administering the lease obligations. So, what exactly is involved in lease administration? It is often thought lease administration is only about monitoring the financial terms of the lease, but that’s not the whole story. There is a lot more that goes into lease administration and a lot of value that can be achieved when done properly. This article discusses some of the foundational elements of real estate lease administration, including lease abstraction, finance, security deposits, tenant improvement allowances, and the importance of monitoring key dates and reviewing documents.
Lease Abstraction
The most important information in your lease needs to be summarized in order to effectively manage your real estate portfolio. This information is usually captured in a lease administration software database or in a lease abstract template. Having consistent lease information throughout your database will help you throughout the life of your leases. Reviewing or reporting any of the rights and responsibilities on a portfolio-wide basis requires that consistent information is abstracted for each lease in the portfolio. Understanding what data is important to your business team and abstracting that data for each lease provides consistent, reliable data useful for making decisions.
Finance
A critical piece of lease administration is monitoring and validating monthly rent costs are paid correctly. A commencement date adjustment could change the rent stream, rent credit, or abatement dates. Should these lease provisions not be closely monitored, with credits taken and amounts paid per the lease document, a financial loss can occur. In addition, accurate rent data is critical for compliance with lease accounting rules and subsequent financial reporting.
Leases are heavily negotiated for their base rent and operating expense obligations. Depending on the property and the lease terms, the operating expenses can be equal to that of your monthly base rent, so it is important to watch these charges closely. Regularly auditing operating expenses, abatements, caps, and fees can save a company a lot of money and ensure compliance with the lease terms.
Security Deposits & Tenant Improvement Allowances
Tracking other financial information, such as security deposits and tenant improvement allowances, makes sure money is not left behind. Security deposits can be in the hundreds of thousands of dollars and tracking the deposit for return of funds, whether it draws down throughout the term or a final refund at the end of the term, is a tenant’s obligation.
Tenant improvement allowances are a significant piece of any lease negotiation. This amount helps a tenant cover the costs associated with building out their space to suit their business needs. However, the lease may state a time limit during which a tenant may request the allowance once construction has been completed. Should the return date be missed, a landlord may be able to withhold the allowance and the money could be forfeited. Overlooking the requirements of these provisions could negatively affect cash flows and affect the overall economics of the lease deal.
Monitoring Key Dates
This is one of the most important areas a tenant needs to diligently track. When does the lease term end? When must the landlord be notified if the tenant is exercising an option? A business must consider, how much time do we need to decide if we are going to look for new space or if we are going to renew an existing lease? Having additional time to negotiate a renewal is extremely important and likely cost effective. Renewing a lease at the end of its term can be expensive. Tenants have more negotiating power when their renewal is handled in advance. Missing a key notice date can result in unintended consequences that can be expensive to remedy.
Document Review
Making sure all working documents relating to each lease in a portfolio have been identified, organized, and saved, either in a database or other secure electronic source, is one of the most important pieces of lease administration. The loss of a document or even a few pages of a document can leave a tenant without necessary information regarding their lease. A good lease administration team will go through each document to make sure all pages are included and are legible for future reference.
Landlords periodically issue documents, like estoppel certificates, for tenants to sign. The receipt of such a document can provide the tenant with an opportunity to resolve outstanding issues with their landlord, such as negotiating a lease audit or completing an ongoing maintenance issue. The lease administration team reviews estoppel certificates for accuracy and alignment with the lease provisions before the estoppel goes to the legal department for legal review, negotiation, and signature. This can save a tenant a good deal of money correcting any landlord errors in the document and preserving lease audit rights.
The areas discussed in this article are just some of many facets of real estate lease administration. Real estate touches so many departments within a company, and is one of the most expensive costs in a company’s budget. Lease administration is valuable to many departments and teams throughout a company. A real estate lease is packed with helpful information needing to be tracked. However, should some of the information be missed, the result could be costly.
Scribcor Global is committed to delivering high-quality lease administration services. Our knowledgeable team can help with all of the areas discussed in this article and more. To find out how we can help you manage your lease administration processes, please contact Sharon today at 630-581-5557 or sotteman@scribcorglobal.com.