Category: Lease abstraction

Lease Administration post: The importance of ongoing lease management

 

If lease portfolio management were to be compared to anything, it wouldn’t be wrong to say it is a marathon. But, a lot of organizations tend to treat it like a sprint race. The only time leases get the attention they deserve is at the time they are signed. When a new lease is signed, organizations make the effort to get it abstracted and entered into their lease portfolio management systems and more often than not it stays put there until termination or renewal comes up. However, this can result in significant economic losses. Let’s look at why consistent, ongoing lease management is important.

You may be overpaying

One of the most important reasons as to why you should be reviewing and updating your lease portfolio is to identify any inconsistencies in CAM expense billing, rent hikes and other operating expenses that the Landlord may be imposing on you. 

You may miss out on various benefits that are not obvious

If you don’t service your leases regularly, you run the risk of overlooking important dates and options that could be beneficial to you. Examples include notice periods for termination, renewal, expansion and the right of first refusal. Keeping an eye on these dates and executing your options at the right time can help you get a good deal on your existing leases.

Repetitive errors may be causing you losses

If your initial abstract has errors, or if you don’t reconcile your operating expense, CAM charges, rent increase and other payments periodically, you run the risk of letting the errors embed into your leases. In cases where the rent/operating or CAM charges increase based on the preceding years’ value, you will erroneously end up paying a lot more than you should.  

You may be miss taking advantage of critical dates and clauses

If you don’t service your leases regularly, you run the risk of overlooking important dates and options that could be beneficial to you.

At some level organizations are aware of the importance of ongoing lease maintenance, but fall behind on their lease portfolio management due to lack of resources. In such scenarios, an experienced and trusted lease administration vendor can help. They can work independently or support your existing lease administration resources to help you stay on top of your lease portfolio management requirements. Plus, their expertise can add value to your internal lease administration process. 

 

A CAM Audit checklist for the busy lease administrator

 

Reconciliation of Common area maintenance charges or CAM expenses, as it is commonly referred to, is an important lease administration task. This blog provides a quick CAM audit checklist that lease administrators can use when reconciling CAM charges. 

Check the definition of Common Area Maintenance (CAM) charges as per the lease

One of the first places to start is the lease’s CAM clause. The items under CAM header will vary depending on the lease type and also sometimes, it may vary from lease to lease even if the leases are of the same type. Reviewing the lease’s CAM clause helps you understand and interpret the CAM charge computations accurately. It helps you understand the various components of CAM charges as per the lease and how they are computed. For example, what happens if you moved into a fairly empty building that’s only gradually filling up? How is the CAM divided among the existing tenants including you, until the time there’s 100% occupancy? What will be the repercussions on your CAM charges as new tenants are signed up.

Check for exclusions

Be sure to check your lease for CAM exclusions. Exclusions in your leases will point out to expenses that are not a part of the CAM expenses. If your lease explicitly lists out items that the landlord cannot charge you for under the CAM header, double check to ensure they are not a part of your CAM invoice presented by the landlord. 

Look for expense caps and ensure they have been adhered to

Leases sometimes also include caps on CAM charges, i.e, a limit on how much the landlord can charge you for the CAM expenses. Check your lease to figure out if it enforces any expense caps, and if it does, then ensure they are being adhered to. Usually expense cap clauses specify the percentage by which the Landlord can increase the CAM charges annually. Make sure the calculations presented by your landlord are in line with the expense caps. 

Remember the effect of occupancy rates on your CAM charges

Depending on the lease type, occupancy also plays a key role in affecting the CAM charge amounts.  If CAM charges are shared on a pro-rate share basis among tenants, each tenant’s share of CAM expense will fluctuate with the occupancy of the leased premises. It will increase if the occupancy rate drops and decrease when a new tenant moves into an empty space in the leased premises, as they will now share the CAM expenses too. While this seems pretty straightforward, this factor is often overlooked–especially if a new tenant comes into the picture during the middle of the lease year. Make sure you check for any new tenant move-ins during the lease year and it’s impact on your CAM charges owed. 

Pro–rata share calculations

Pro-rata share calculations are a big element when it comes to determining the accuracy of the CAM charges levied upon you. Ensure your pro-rata share has been calculated accurately and you are paying only the percentage of CAM charges that you actually owe as per your pro-rata share. 

If there are amortizations factored into the CAM charges, then, are they as per the lease stipulations?

Are there any amortized expenses that the landlord is passing on to you as a part of CAM? If yes, make sure they are factored in as per the lease. While leases often allow landlords to amortize and pass on capital expenses related to improvements in the common area, you need to ensure it is done as stipulated in your lease. And remember, as discussed above, even the amortization amount will decrease if there’s an increase in the occupancy rate of the leased property.

Know your audit rights

Most leases specify audit rights that tenants have in terms of CAM expenses, that allow tenants to audit the landlord’s ledgers and peruse their invoices related to CAM expenses to ensure the CAM charges levied upon the tenant is accurate. It is important that you know you audit rights as a tenant and exercise them when the need arises. 

When it comes to CAM reconciliation you know that making even a miniscule calculation mistake can cost you thousands of dollars.  CAM Audit  is a key lease administration function that needs 100% focus and concentration–which can be challenging if your lease administrators are overworked. RE BackOffice can help you overcome this challenge through our team of virtual lease administrators. You can hire our virtual lease administrators to support your in-house lease administration team, so their focus is never diluted due to work pressure. 

Contact us at support@rebackoffice.com today to learn more!

Lease budgeting: Best Practices

 

Budgeting for lease expenses is an important process in lease portfolio management. Leases are critical agreements that include a significant amount of expenses (if you are a tenant) attached to them. Lease budgeting is the process of budgeting for those expenses in advance, so you are not caught off-guard when it is time to make the payments. While the concept seems simple, it can get a bit overwhelming when you have a large portfolio of leases spanning across multiple locations, with each lease having different dollar amounts and payment due dates. This blog discusses some of the best practices related to lease budgeting.

What are the expense items that you want to budget for?

Start by making a list of the key lease elements you want to budget for.  There are various expense items/cash flows in a lease. It all depends on the type of lease. For gross leases, you just need to budget for the lease rental as that pretty much covers everything, but for net leases, there are various items to consider. You need to identify which ones you want to budget for. Usually, CAM or common area maintenance charge is a big element, but there are others like real estate taxes, snow removal services, etc, which may have to be budgeted for as well. 

How much do the items you identified typically cost?

The next step is to identify or estimate the cost of the expense items you have listed. You can arrive at a pretty accurate estimate based on the the last few year’s actual amounts spent in regard to those expense. If your lease has an annual increase percentage mentioned for any of those expenses, make sure you take the increase into amount when estimating the cost for the upcoming year. Looking at the actual lease portfolio expenses of last 3 or 5 years minimizes budget variances and helps you prepare a lease budget that’s as close to the actual expense as possible. 

Check old variance reports, so you can sidestep older mistakes and oversights

You can also look at the last few year’s variance reports. Variance reports tell you the difference between your budgeted and actual cash expenses. Learning about the variances over the years and understanding why they happened will help you prepare a more accurate lease budgets.

Do your market research

Spend some time researching and looking at the financial predictions for your market. Market forecasts for your lease locations can impact your budget significantly. For example, if your market is predicted to have a lower occupancy, it may drive your pro-rata common area maintenance (CAM) charges higher. Checking out market forecasts can help you factor for such unexpected variances.

Lease budgeting is a critical task, but also time consuming and labor intensive and needs to be performed accurately every year. Consider bringing a lease administration team on board during the budget season so they can offer your lease administration team additional help. Either they can take over your lease budgeting task, or your mundane lease administration tasks so your in-house lease administrators can work on creating an accurate lease budget for the year. 

Types of leases: An Overview

 

We all know what leases are–legal contracts by which the landlord conveys a property (real estate or equipment) to the tenant for a predetermined time frame. The tenant makes periodic payments to the landlord in exchange of right to use the property for the specified period of time. When it comes to commercial real estate leases such as office and retail, the leases can be classified into different types based on how they treat various expenses. This blog offers a quick overview of three main types of leases-namely, the triple net lease, modified gross lease and gross or full-service lease.

Net leases

Net leases are lease agreements where the tenant pays the rent and their share of other common expenses including utilities, taxes or insurance. Net leases can be further classified into single net, double let and triple net leases.

A single net lease

In case of a single net lease, the tenant pays their rent and their share of one of real estate taxes.

Double net lease

In a double net lease, the tenant pays their rent and their share of real estate taxes and insurance premium related to the premises.

A triple net lease

A triple net lease is also often referred to as NNN or 3N or sometimes, even simply as a net lease. In a net lease, the tenant pays the landlord only the rental fee and all other property-related expenses such as utilities, taxes, insurance are are borne by the tenant. Triple net leases usually work well when the lease term is 10 years or more. 

A gross lease

A gross lease is just the opposite of a triple net lease. As the name suggests, in the case of a gross lease agreement, the tenant pays a lumpsum amount towards rent to the landlord and then it is the landlord’s responsibility to take care of all other expenses such as taxes, insurance and utilities.

A modified gross lease

A modified gross lease is, in a way, a mix of both, the net and gross lease concept. In a modified gross lease, the tenant pays the rent as stipulated in the lease to the landlord and also their pro-rata share of real estate taxes, insurance, utilities and other operating expenses. 

What kind of lease is the best?

Each of these leases have their own benefits, for both, the landlord and the tenant. So, without any context, it is not possible to pick the best lease type out of these. For example,

In case of net leases, it is beneficial to the tenants in the sense that their base rent is considerably lower than a gross lease. However, it works well only if the property is well-maintained and has high occupancy rates, that push down the tenant’s prorata share of common area charges. In a low-occupancy or poorly maintained property, a net lease may not be beneficial to the tenant. Plus, there’s the hassle of CAM reconciliations and audits that the tenant has to conduct every year to ensure they have not been overcharged by the landlord.

On the other hand, while a gross lease spares the tenant the hassle of paying for common expenses separately and CAM reconciliations and audits to ensure they were invoiced accurately by the landlord. But, overall, gross leases tend to work out more expensive than modified gross and net leases. 

A modified gross lease has its share of benefits too. It is best suited for leases whose tenure is less than 10 years. As the tenant pays some share of their common property expenses, their overall rental costs tend to remain lesser in comparison to a gross lease. 

A step-by-step guide to CAM Budgeting

 

Budgeting for lease expenses is a critical task. Though it needs to be done only annually, i.e., once a year, it cannot be taken lightly and is also quite time consuming. Especially if you have a large lease portfolio. Budgeting is nothing but estimating the costs you will incur during a set time period. From a tenant’s perspective, CAM budgeting refers to the process of estimating the common area maintenance costs (CAM charges) that you will be incurring during the financial year. Budgeting helps you plan ahead for your expenses so you are not caught unprepared when they are due. However for budgeting to really serve its purpose, it has be accurate and as close to the actual amount as possible. This blog provides a step-by-step guide to budgeting that will help you budget for your CAM expenses efficiently and accurately.

The first step in budgeting for CAM is to identify how CAM charges are calculated and levied as per your lease agreement. Make list of chargeable items under the CAM header. Some common CAM expenses include common area utilities, elevator maintenance, parking lot maintenance, centralized HVAC charges, snow removal expenses, etc. The elements included in the CAM header vary from lease to lease. 

The second step is to make a list of items that are not a part of your CAM charges. This is important because, as a tenant if you are paying the service provider directly for the services you use, then those shouldn’t be a part of your CAM calculations. For example, if you are paying your utility charges directly to the utility company or you pay the snow and trash removal companies directly for the services you utilize, then these charges shouldn’t find their way into your CAM expense. You will still need to budget for them, though, because it ensures you are prepared for these expenses. But, they are not a part of your CAM budget.

The third step is to look at the CAM expense trend in the preceding years so you can arrive at an estimated expense amount. Another exercise to perform at this stage would be peruse invoices pertaining to the previous year and using that as a base for the upcoming year’s budgeting. At this stage you might also want to look at what the variance has been historically when comparing the actual CAM charges with the budgeted amount for the last few years. Is there a significant difference between the two? If so, then where? Try to identify specific CAM headers where there is significant difference in the budgeted vs. actual expense, so you can estimate more accurately for the upcoming year. 

The fourth step is to understand your CAM calculations as per the lease. How does the landlord determine how much you owe them in CAM? Usually, CAM charges are divided amongst all the tenants based on their pro-rata share. Pro-rata share calculations are the cornerstone of CAM charges computation. Ensure you understand the pro-rata computation specified in your lease and calculate it accurately when budgeting for CAM expenses. Also check if there are any caps on the CAM expenses that your lease specifies. Caps force landlords to limit CAM expenses to a certain pre-approved threshold, which is usually a percentage of the previous/base year’s expenses. Understanding your CAM computation method and caps will help you budget more accurately.

Factor in the unexpected

In this post-pandemic world, it makes sense to factor for any unexpected events that may cause a significant dent in your budget. When it comes to CAM budgets, you need to consider occupancy fluctuations and how it may affect your CAM expense as per your lease agreement. Occupancy is a key factor affecting the pro-rata share of tenants when it comes to CAM charges. Depending on the gross-up terms and conditions agreed upon between the landlord and the tenants, the tenant’s pro-rata share of CAM expenses will vary if the occupancy rate of the premises fluctuates. In order to ensure your CAM budgeting covers such eventualities, take into consideration any changes in occupancy rate including move-ins, move-outs, expansions, contractions, etc. that may occur in the foreseeable future. 

Budgeting for CAM takes time and effort, and needs to be done diligently every year, on time. It makes sense to enlist the support of an experienced lease accounting and administration services provider. Especially when you have a large lease portfolio with hundreds or thousands of leases spread across the country. An lease administration vendor who specializes in CAM reconciliations and budgeting will add a lot of value to your budgeting process through their expertise, industry knowledge and experience.

Budgeting for CAM efficiently

 

The budget season is definitely not anyone’s favorite, but the fact is, if you have a lease portfolio, then you cannot sideline budgeting for lease lifecycle and related elements. One of the key elements you will budget for is CAM. Common area maintenance (CAM) charges are the tenant’s share of expenses that they owe the landlord. CAM charges are paid by tenants to reimburse the landlord for expenses incurred by them for –

  • Maintaining common spaces such as elevators, lobbies, stairwells, parking, etc.
  • Services that benefit all tenants such as snow removal, trash removal, security, etc.

CAM charges are divided among all tenants based on their pro-rata share, which is calculated based on the area leased by the tenant. A tenant with a larger leased area will pay a greater percentage share of CAM expenses than one with a smaller area. 

In order to help tenants and landlords plan better and ensure no single party has to bear the load of  sudden, unforeseen large expense in the form of CAM charges, landlords resort to budgeting. Budgeting for CAM involves estimating the CAM expenses for the year for the entire property, computing each tenant’s share of expenses based on the estimate and sharing that with them so they can prepare for the expenses and also make payments to the landlord as stipulated in the lease. The CAM expense budget is usually prepared based on the previous year’s actual expenses incurred. At the end of the year, the estimates are verified against the actual expenses incurred by the Landlord and invoices are raised to the tenant for any additional charges that need to be paid. Similarly, in the event of any overpayment, the same is credited back to the tenant. While the process seems fairly simple when you look at it from a single lease’s perspective, it can be complex and time consuming when you have large lease portfolio consisting of hundreds of leases or more. Add multilingual leases to the mix and the CAM budgeting becomes even more challenging. 

However, as discussed earlier, this is a annual task that crops up every year around the budget season. So, hiring a full-time lease accounting staff just to meet the increasing resource requirements during the budget season can’t justify the costs associated with it. It makes sense to work with a lease services vendor who can offer additional support to help you tide over budget season-specific resource requirements. This helps you save on costs that you would incur if you hired lease accountants or specialists in-house, on your payroll, full-time. This arrangement also eliminates training, HR-related expenses and save on lease agreement interpretation and translation costs, as all of these are taken care of by the vendor. Plus, you stand to benefit from your lease services vendor’s expertise. Vendors who provide lease services are specialized in what they do and bring their industry knowledge, experience  and expertise to your budgeting process.