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Lease Renewals: Where to start and how to go about them

Lease renewal clauses are very important for tenants in the sense that they provide them the opportunity to continue with a profitable lease or to exit out of an unprofitable one. This blog focuses on certain metrics tenants should consider before renewing a lease.

The renewal clause

This is the obvious starting point when analyzing your lease’s viability in terms of renewal. Does your lease have a renewal clause? What does it say exactly. In most cases, if you intend to renew your lease, as a tenant, you will have to provide the landlord with a notice expressing your intent to renew the lease. Your lease will usually also stipulate a timeframe within which the notice is to be provided and such notice is usually a couple of months or days prior to the expiration of the then current lease term. In some cases the renewal clause may also mention the rent for the new term, that you would owe the landlord and the duration of the next lease term should you choose to renew the lease.

Sometimes, leases have automatic renewal clauses in which case, the lease automatically renews for the next term at a said rental rate if the tenant doesn’t provide a notice to terminate it. In both cases, as we can see, there’s a need to provide notice to the landlord within a stipulated period before the existing lease term expires.

So, as a tenant, it is important to peruse the renewal clause of your lease agreement thoroughly and also be alert and keep an eye out for the notice period and key dates, so you don’t miss out on a good deal by failing to renew a profitable lease on time.

Do your research

The next then to consider is, whether the lease agreement is worth renewing in the first place. When trying to determine this, ask the following questions to –

Is the location of the property beneficial to you? Is it specifically helping in bringing in clients (if you are a office/professional service provider) or increasing sales revenue (if you are in retail)
Are you getting any special benefits (eg. Governmental grants, tax credits) because you are operating your business in the particular leased premises?
At what rental rates are other similar, comparable properties in the vicinity priced? An in-depth comparative analysis will help you understand if you are being charged fair rental rates by your landlord and will also help you negotiate your rent for the upcoming term, should you decide to renew your lease
Are there other, similar properties available for lease in and around your current leased premises? If yes, then you should spend some time checking them out, do a bit of quote shopping and understand the pros and cons of the available options.

Doing your research will not only help you make the right decision with respect to lease renewals, but it will also help you negotiate better terms with your landlord. For example, if you find comparable premises in your area are priced less in terms of rent or have better amenities or other perks, you can negotiate with the landlord for a better deal such as reduced rent or ask them to provide you with Tenant Improvement (TI) allowance.

Have a strong lease administration process

While the boxes to check in this checklist for lease renewal may seem pretty straightforward, it becomes complicated when you have a large lease portfolio. When you have thousands or even hundreds of leases with different renewal dates and varying terms and conditions, it can get overwhelming. If that sounds familiar, you should reach out to a trusted lease support service provider who can take care of this for you. A lease administration services provider will have a large team of experienced lease administrators who can help you stay on top of your lease portfolio irrespective of its size.

Also, make sure you invest in a lease administration software platform which captures important dates such as the last date for exercising lease renewal options, and also generates alerts in a timely manner so you have the time to think through, calculate and take a well-informed decision regarding the renewal.

Rebolease.com, powered by RE BackOffice, Inc., is a premier provider of lease abstraction, administration, audit and accounting services. Headquartered in Pittsburgh, PA, we are a global boutique firm, providing high-quality services to top-tier clients across industry verticals, covering every type of lease and on any lease platform. We are proud to be a trusted partner, for 15+ years, to leading retailers, REITs, property owners/managers, and corporate accounts seeking a strategic advantage. All client projects are performed in-house.

Are you paying more than your fair share of real estate taxes (RET) to your landlord?

Real estate taxes are one of the most common elements of operating expenses that the landlord passes on to tenants. However, did you know that you could be paying much more than your actual share of real estate taxes for the premises you leased? This blog discusses a few things to consider before you pay your share of RET to your landlord, so you don’t end up paying more than you owe.

Tax Refunds

When the landlord levies property taxes on tenants as per their pro-rata share, they should also credit any tax refunds received to the tenants’ accounts accordingly. However, sometimes, landlords may fail to credit the tax refunds or make errors in refund pro-rata calculations that tenants need to watch out for.

Not pursuing tax certioraris

The landlord must assess the taxes levied upon them every year to ensure they are in accordance with the local real estate laws. Tax certiorari allows landlords to challenge the real estate tax amount levied upon them. However, many landlords may overlook this step as they know their tenants will share the tax load anyway as per the lease agreements.

Including personal taxes

Landlords may erroneously include their personal taxes such as the tax on personal property or tax on income from a rental property in the real estate tax calculations for the leased premises, thus passing it on to their tenants.

Tax professional’s fees

Your landlord may incorrectly bill you for the expenses they incur when they hire a tax professional to work out their real estate taxes. While, as a tenant, you may be obligated to pay your share of the real estate tax as stipulated in your lease, the clause most likely won’t cover tax professional’s fees, which means, sharing the fee as a part of the tax pass-throughs would be incorrect.

How are the real estate taxes actually calculated Vs. how they are stipulated as per the lease?

As a tenant, it is very important to ensure that you have a solid understanding of how the real estate taxes will be calculated for you as per your lease.

Are you paying your pro-rata share of RET or are being charged per square feet?

In some cases you will pay only your pro-rata share, whereas in some cases the landlord may have gross-ups and pass-through options that allow them to divide the total real estate taxes among all the tenants present in the building, irrespective of whether the building is fully occupied or not.

If your RET share is calculated per square foot, you need to ensure that the base of this calculation is correct–which is the leased space or sometimes referred to as square footage. Sometimes, even a minute error in lease square footage calculation can make a vast difference.

Verifying real estate tax amount levied upon you as a tenant by your landlord, and ensuring the amounts levied are accurate is complex especially if you are sharing the premises with multiple tenants. Real estate taxes often involve complicated computations that leave room for interpretation and also increase the chances of miscalculations. For example,

What happens if you moved into a fairly empty building that’s only gradually filling up?
How are the real estate taxes divided among the existing tenants including you, until the time there’s 100% occupancy?
What will be the repercussions on your real estate tax share as new tenants are signed up.

It is also essential that you are on top of these calculations to ensure there are no errors, as errors that are embedded in the lease, year, or year can cost you dearly even impacting your key real-estate-related business decisions.

Two things that can help you in this regard are

Timely CAM audits by an experienced lease services provider who will double check the tax computation, invoices and other related charges levied by the landlord to identify any errors and have them rectified for you.
Accurate lease abstracts that simplify complex lease terms for you without diluting their essence so you understand your rent roll and related components clearly.

Tax pass-throughs are just one of the many items in operating expenses that need to be audited by tenants to ensure they are not being overcharged. A lease audit that covers all elements of CAM charges and operating expenses is a must on an annual basis to ensure you, as a tenant, don’t pay more than what’s due.

Hiring a lease administrator? Here’s what you need to know

Are you looking to hire a lease administrator? Lease administration is a critical function of lease portfolio management, so hiring a lease administrator to help you stay on top of the leases in your portfolio is a major decision and certainly one which you want to get right. This blog discusses a few key questions you should ask your lease administrator before you trust them with your leases.

Experience

When interviewing a prospective lease administrator, pay attention to their lease administration experience. Apart from the obvious, such as the number of year have they been into this service line, find out what kind of leases have they worked on. For example, if you are a retail business, then it is better to hire someone who has had experience in retail lease administration.

Another aspect to check in terms of experience is their knowledge of your lease administration platform. Have they worked on the lease administration software that you are using? While it may not be difficult to adapt to a new lease administration software, hiring someone who has already worked on your lease administration software platform and has experience dealing with leases from your industry vertical will drastically cut down the training time and give you better ROI on your new hire.

Scope of work that they have handled before

The next step is to understand what is/has been their scope of work in terms of lease administration. Lease administration is a very broad bucket and includes various lease support services such as CAM audit and reconciliation, notice processing, critical date monitoring, liasoning with landlord, payment processing, etc. (You can learn more about it here) You want to make sure that your lease administrator has the experience handling all of these tasks.

References

Ask your prospective lease administrators to furnish you with client testimonials and referrals. Make sure they are able to give you client names and contact information, so you can verify if the glowing client testimonials they provide are authentic. It is even better if the organizations/clients they have worked with are from your industry vertical.

What about lease abstraction?

While lease administrators usually work with lease abstracts or leases that have already been abstracted, it is good to know if your lease administrator has the skillset necessary to abstract leases. There always exists the possibility of mergers, acquisitions, renewals, amendments and addendums. Having a lease administrator who has strong language and lease interpretation skills will be helpful as they will be able to abstract your leases or update it accurately.

There’s more to lease administration than just CAM Reconciliation!

Lease administration is an important process helping you stay on top of your lease portfolios. Typically, when we come across the term, lease administration, one of the first things that comes to mind is Common Area Maintenance (CAM) audit and reconciliation. However there’s a lot more to the lease administration process than just CAM reconciliation and lease audits. While CAM reconciliation is one the core tasks and most time-consuming, there are other equally important processes that are a part of lease administration. This blog post sheds light on them. They are-

Renewal notice processing

Renewal is the option to extend the term of the lease after the expiration of the existing lease term. Renewal clauses give the tenant the right to extend the lease term for a specified period of time and at a pre-defined rental rate. However, for the renewal to take effect, the tenant has to provide a notice to the landlord within the time frame specified in the lease. Sometimes, leases have automatic renewal clauses in which case, the lease automatically renews for the next term at a said rental rate if the tenant doesn’t provide a notice to terminate it. In both cases, as we can see, there’s a need to provide notice to the landlord within a stipulated period before the existing lease term expires. Lease administrators should track such critical dates and notice requirements and either alert the tenant about them so they can send the notice or send the notice on behalf of the tenant if the tenant has authorized them to do so.

Estoppel notice processing

Estoppel certificates are usually created by the Tenant for Landlord’s use. If the Landlord is in talks with a prospective buyer for their property, or with a lender who secures the loan with an interest in the said property, they may require the Landlord to furnish an estoppel certificate. The prospective lender or buyer of the property may use in their “due diligence” review of the property. The tenant is usually given a time frame of 10 or 20 days within which they have to submit the estoppel certificate to the landlord. Lease administrators in the tenant’s organization are responsible for timely processing of such estoppel notices.

Security deposit returns management

Security deposit is a lumpsum amount paid by the tenant to the landlord as a guarantee for the performance of lease obligations. Security deposits are usually refundable and returned to the tenant at the end of the lease term, provided there is no damage to the property and the tenant has fulfilled all their obligations under the lease. It is the responsibility of the landlord to refund the security deposit within the timeframe stipulated in the lease after the property is handed over back to the landlord by the tenant. If the landlord fails to return the security deposit on time, they are liable to pay penalty to the tenant along with the security deposit amount. Lease administrators on the landlord’s side are responsible for ensuring the security deposit returns happen on time, so the landlord is not in default and thus not liable to pay any penalty. At the same time, lease administrators on the tenant’s team are responsible for ensuring that the security deposit amount is received on time and is accurate.

Rent increase management

Lease administrators are also responsible for managing the increase in rental rates as per the leases. From the landlord’s perspective, their lease administrators are responsible for keeping track of rent increase dates, reviewing the lease clauses related to the rent increase, calculate the new rent as per those and then communicate the same to the tenants within the stipulated time period. At the tenant’s end, the lease administrator is responsible for reviewing the lease clauses related to rent increase and confirm if the rent amount increase specified by the landlord is correct and process the payment if it is accurate while contesting it if the landlord’s calculations are not accurate.

Subordination and non-disturbance agreement (SNDA)

From the landlord’s perspective, their lease administrators assist the landlord in generating SNDA for property sale or debt financing. From the tenant’s perspective, the lease administrators are responsible for updating their lease administration platform in the event of change of landlord or any other obligation related to the SNDA.

Commencement date letters

Lease administrators manage commencement dates and rent commencement dates as per the lease. From the landlord’s perspective, their lease administrators are responsible for reviewing the lease clauses related to commencement date and rent commencement date, keeping track of them and communicating the same to tenants. At the tenant’s end, the lease administrator is responsible for reviewing and updating the rent/lease commencement letters received from the landlord and updating them in the tenant’s lease administration software and process related rental payments accordingly.

Liasoning services

Lease administrators are also responsible for communicating with tenant/landlord/other parties for lease-related processes and ensuring such processes run smoothly and are taken care of on time.

Outsourcing your lease administration process or looking to hire a lease administrator? Make sure your new lease administrators are adept at all of the above services and not just CAM!

Can you trust your lease support services vendor?

Staying on top of your lease portfolio is critical but also challenging. This is true regardless of the size of your lease portfolio, but it is even more complex if your lease portfolio is large containing hundreds or thousands of leases spanning across different countries or when the leases drafted in different languages. Outsourcing your lease abstraction, lease administration and other lease support services to an experienced, trusted lease support services vendor is a great way to overcome these challenges.

Outsourcing your lease support services helps you-

Save on costs that you would incur if you hired lease support service staff in-house, on your payroll. It helps you eliminate training, HR-related expenses and save on lease agreement interpretation and translation costs, as all of these are taken care of by the vendor.
Stay on top of your lease portfolio as you will have access to your lease support services vendor’s team of lease administrators even if your in-house team struggles to meet tight deadlines, especially if it is a bigger project.
Leverage the expertise and industry experience of your lease services vendor. They have more experience in handling multiple types of leases and tend to offer better accuracy, relevance, and compliance than in-house lease administrators who comparatively have lesser exposure.

While the benefits we discussed above look great on paper and do actually translate into reality, you need to make sure you pick the right lease support services vendor. From that perspective, here are a few things to consider when partnering with a lease support services vendor for your lease management needs.

Who are they?

The first question to ask before entrusting your leases to a lease support services vendor is, who they are. Are they a recognized, well-known, lease abstraction and administration services vendor?

Where are they based?

The next question pertains to their location. Where is your lease abstraction or administration vendor located? A lot of lease support service providers operate from off-shore locations. While that is okay, it is definitely a huge plus point for you if their office is located in the United States.

Do they do the work themselves?

This is a very important question. Before outsourcing your lease administration or lease abstraction requirements, make sure you confirm with your lease support services vendor that they are the ones actually performing the tasks. It is not uncommon for companies to undertake lease abstraction and administration projects and then outsource them further to a sub-vendor or even to freelance lease abstractors and administrators in a bid to cut costs. This is extremely dangerous as it puts you in a very vulnerable position as your leases travel all over the world sometimes–without your knowledge. And, if you are broker or a tenant rep managing your client’s lease portfolios, you risk legal action against you in the event something goes wrong.

Who are their clients?

Ask your lease support services vendor to furnish you with client testimonials and referrals. Make sure they are able to give you client names and contact information, so you can verify if the glowing client testimonials they provide are authentic.

How long have they been in business?

Make sure you don’t entrust your leases to a random fly-by-night start up that’s here today, gone tomorrow. Trusting such vendors with your critical lease data is not a good idea from the data security standpoint. Plus, you need a lease administration and abstraction vendor who can be a trusted partner and help you scale, as your lease support service needs grow or decline. While a newly found startup may be cheap, they usually do not have

The resources to support your lease needs as you grow
Stringent data security measures and may end exposing your critical lease data to risks of data theft and loss
The expertise and experience needed to handle complex lease data

Leases are critical business documents that are also confidential and legally binding. You don’t want your leases getting into the wrong hands! Make sure you partner with a lease support service provider with years of industry presence and experience that is trusted by your peers.

When to Commission a Lease Audit?

Lease abstracts are the backbone of your lease portfolio management process as they capture the essence of leases that otherwise run into hundreds of pages. By summarizing the key financial and non-financial data contained in the leases, lease abstracts make it easy for lease administration teams to stay on top of the lease portfolio. It ensures that lease administrators and lease portfolio managers don’t miss out on critical dates and payments, no legal obligations are violated and no opportunities provided in the lease is missed. However, a lease abstract will be able to serve these purposes only if it is accurate. Relying on a lease abstract that’s ridden with errors or is outdated will do more harm than good. This is where lease audits come into the picture. Lease audit is the process of verifying the accuracy of your lease abstracts and ensuring the abstracts are complete and up-to-date. Here are some reasons to commission a lease audit.

Your leases have been updated

If your leases have been amended, renewed or have had addendums included, it’s time to make sure your existing lease abstracts capture any relevant information from those. At this time, it makes sense to commission a lease audit and review the entire lease abstract in the light of the changes/modification to the original leases and make the necessary updates.

You are migrating from one lease administration system to another

If you are moving your leases and lease abstracts from one lease administration software to another, or even if you are making the big switch from spreadsheets to a more robust lease administration platform, it is a good time to do a lease audit on all your lease abstracts. As you invest in quality lease administration software with a view to streamline your lease management process, you don’t want to start off with outdated or inaccurate data. A lease audit ensures the information you move to your new lease administration system is accurate and useful.

You are are unsure of the quality of the lease abstracts in the first place

Lease audits can be used as a diagnostic and remedial tool if you are not satisfied with the quality of your lease abstracts. If you notice that your lease administrators are consistently having a tough time staying on top of critical dates, payments, notices, etc, and are scrambling for data in the last minute, there could be more to the problem than what meets the eye. If such misses are frequent, it could be indicating a problem at the very core of your lease database–the lease abstracts. Either your lease abstracts are inaccurate, meaning they don’t have the right information, or they may be incomplete in the sense that they may have not captured lease data that is critical to effective administration of the leases in your portfolio. A lease audit will help you figure out the root cause of the problem and fix it once and for all.