Category: Lease Administration

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.

Outsourcing lease abstraction & administration: What to consider?

 

Leases are critical business documents that drive key strategic decisions, and your lease abstracts help you make those decisions. While lease abstracts are the first step to staying on top of your lease portfolio management process, getting your leases abstracted and managed in-house can be challenging due to various reasons such as the high resource costs, lack of resources, tight timelines, etc. This blog discusses how signing up with a lease services vendor can help you overcome these challenges and, what are the key areas you need to focus on before you bring a lease services vendor on board.

Cost-efficiency

By working with a lease abstraction services vendor, you can save on costs that you would incur if you hired lease abstractors 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.

Scale up or down easily

Signing up with a lease abstraction vendor helps you scale your lease abstraction resources up or down as per your needs, allowing tide-over temporary resource requirements. For example, at the time of major mergers and acquisitions, or renewals across multiple locations, bringing a lease abstraction vendor onboard is a more efficient way to handle your abstraction needs than hiring in-house. 

Expertise

Vendors who provide lease abstraction services are specialized in what they do. It is their bread and butter, so they are naturally well-versed in the latest industry trends. They have more experience in handling multiple types of leases and tend to offer better accuracy, relevance, and compliance than in-house abstractors who comparatively have lesser exposure.

Improved turnaround time

Lease abstraction service vendors have a team of lease abstractors at their disposal, which means they won’t be overwhelmed by the volume of your lease abstraction project even if it runs into thousands of leases, and will be able to deliver your lease abstracts on time. Your in-house team may struggle to meet tight deadlines especially if it is a bigger project. 

There are a lot of lease abstraction vendors in the market, but you want to make sure you pick one with the right amount of expertise, experience, industry knowledge, and reputation so your lease abstracts are accurate, concise, complete, and relevant to your business needs helping you make better operational and strategic decisions, consistently. Asking the following 6 questions might help you pick the right lease abstraction vendor. 

Question-1: Do you perform all your projects in-house?

Did you know that often lease abstraction and admin vendors outsource their work to other agencies? You should be aware if your vendor also engages in similar subcontracting projects as it can affect you in 2 ways–

  1. Data security and confidentiality: If your critical lease data is being shared with someone else, it can have serious consequences. Unless you are convinced of the data security measures adopted by your vendor and the sub-contractors, you can’t rest assured that your data is safe.
  2. Possible delays: If your vendor is relying on someone else to do the actual work, any impediment on the subcontractor’s end will end up delaying your project and result in missed deadlines–something you cannot afford when dealing with critical time-bound, needs-based triggers like Due Diligence and acquisitions.  

Question-2: How big and experienced is your team?

It is important that you ask your potential lease abstraction and administration vendor about their team strength and collective experience. These factors play a key role in the quantity and quality of output they deliver. One of the reasons why many organizations prefer to outsource their lease abstraction and administration processes is because of the scalability and flexibility they get by outsourcing. If your vendor doesn’t have enough staff strength to scale up with you during times of resource shortage, or when you have an exceptionally higher load of leases due to factors such as an acquisition, merger or new outlets opening, then you fail to leverage a key benefit of outsourcing. 

At the same time, be sure to ask about the overall team experience, as this has a direct impact on the quality of output and also on its quantity. An experienced team will be able to deliver high-quality output in a relatively shorter timeframe.

Question-3: Will you collaborate with our other stakeholders?

For the lease administration process to be effective, often, the lease administrators will have to get in touch with others in the legal or accounting functions of the landlord or tenant’s business. This is especially true in case of recurring lease administration tasks such as reconciliations, collections, etc., You may even have an in-house lease admin team with whom your vendor may have to collaborate often. Having a lease administration vendor who can do the liasioning for you will make the entire process more efficient and you will be spared the hassle of multiple emails and calls to collaborate with different stakeholders across the country or even the globe, if you have an international presence. 

Question-4: Can you give us client references?

Ask your potential lease abstraction and administration vendors for client references. When outsourcing a process as important as lease portfolio management, you want to make sure that your vendors truly place great emphasis on customer delight and creating positive customer experiences. One of the ways to verify that is by asking for client references and testimonials. It is even better if the clients are from your industry.

Question-5: What about client support?

Ask your vendor about their client support set up. Do they offer 24h client support? Are they available on all working days of the week? What about the point-of-contact? Will they offer you a single point-of-contact throughout the course of your project? This becomes especially crucial when you have offices operating from different parts of the world. Having a single project manager to handle your lease portfolio can make the process more fluid, transparent and efficient.

Question-6: Can you customize your service offerings?

When it comes to lease portfolio management, every client, every industry is different and the one-size-fits-all service model won’t work well.  For an outsourced lease portfolio management process to work well, it is important that your vendor caters to your industry-specific needs and customizes their service offering to meet them effectively.

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.

What is a lease management system?

 

A lease management system, also referred to as lease administration software or lease administration platform, is a software program that allows users to manage their lease portfolio efficiently. 

What are lease management systems used for?

Lease management systems are used to store, retrieve and monitor key lease data. Lease management systems are widely used by businesses and entities that have lease portfolios that need to be managed. This includes, retailers, corporate, REITs, real estate brokers, property managers, owners and other similar entities. If, as a business, you have just one or two leases, you probably don’t need a lease management system. A good lease abstract summarizing the key financial and non-financial information from those few leases onto a spreadsheet is probably enough. But, on the other hand, if you are an organization with presence across multiple locations, then, along with lease abstracts, a lease management system is a must to stay on top of your lease portfolio. 

What are the key benefits of a lease management system?

Lease management systems can help you 

  • Meet the compliance requirements as per lease accounting standards such as FASB ASC 842, IFRS 16 and GASB 87
  • Get a 360-degree view of your lease portfolio and all the lease agreements therein. This plays a key role in helping you make the right business decisions in relation to your lease portfolio. Examples include decisions that affect lease profitability and ROI including renewals, terminations and subleasing. 
  • Have a single, standardized repository for all lease documents, which can be accessed by all relevant departments throughout the organization. 
  • Get better lease insights through multiple dashboard, summary and reporting modules, addressing the lease data needs of different departments effectively. 
  • Stay on top of your lease portfolio by generating alerts and notifications for critical events such as notices, expiration dates, invoice due dates, renewals and other obligations. This helps ensure that you don’t miss any critical dates. Missing critical dates can have serious consequences, such as penalties or even lease termination.
  • Keep your payment schedules on-track and accurate. They allow you to effectively manage your lease-related expenses and payments such as regular rental payments, percentage rent calculations, Common Area Maintenance (CAM) charges and reconciliations.

Lease management systems are indispensable if you have a lease portfolio consisting of multiple leases. But a lease management system alone isn’t enough. You need accurate lease abstracts of all the leases in your lease portfolio and also an experienced lease administration partner who can help you optimize  your lease administration software so you get the best ROI. 

Learn more about the top lease management systems of 2022 here!

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.

7 ways to make your lease administration function more efficient

 

Lease administration is a critical business function as it plays a key role in helping organizations stay on top of their lease portfolios. The goal is to reduce the risk of missing critical dates and payments and meet all legal and regulatory requirements as far as the leases are concerned. This blog discusses 7 ways to make your lease administration function more efficient. 

Accurate lease abstracts

Lease abstraction is the process of extracting critical data which involves obligations. Your lease administrators rely on the abstracts of your leases. Lease abstracts provide a quick overview of the key financial and non-financial clauses of your lease. If your lease abstracts are inaccurate or fail to capture critical information, your lease administration won’t be efficient or accurate. The end result could be monetary losses running into thousands of dollars.

Full compliance with lease accounting standards

The recent accounting standards mandate the abstraction of additional data points, which may mean that leases need to be abstracted again. If you don’t have the resources for this one-time re-abstraction of your leases, your lease administration function will be affected. Additionally, non-compliance will attract penalties.

Have a strong lease administration process in place and evaluate it from time to time

Developing and implementing an effective lease administration process is important for the successful functioning of the lease administration department. Equally important is the consistent evaluation of the processes. This exercise is important to ensure the steps involved are not redundant and are producing the desired results without losing any critical information.

Invest in the lease administration software that’s right for you

Investing in a lease administration software is a must to stay on top of your lease portfolio and for efficient ongoing lease management. While there’s no doubt that lease administration software programs are indispensable, things start to get a little tricky when it comes to selecting a lease administration software. 

Click here to learn more about the top 10 lease administration software programs of 2022.

Hire the right people!

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. 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!

Have lease translators on board, if need be

If you are a retailer with a lease portfolio that extends beyond the US borders, you also need to consider using ther services of a lease translator. Global lease abstraction projects require robust language translation capabilities and the ability to understand the various regional nuances. For example, not all English leases are the same. There will be differences in the language and their interpretation from region to region, such as between the US and UK. So, while the language is the same (English), regional nuances and knowledge of the legal terminologies pertinent to the country come into play when abstracting the lease.  

La team isn’t siloed

Lease administration team’s role has broadened considerably as a result of the additional tasks that previously fell under the purview of the legal, accounting, and finance department. But to accomplish these additional tasks, there is a need for transparency and coordination between the lease administration department and all other departments. A lease administration team that works closely with these other departments will be much more efficient and effective than one working in silo

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.