Category: Lease Administration

Lease Budgeting Process: What to Consider

 

Why is budgeting and forecasting important?

Budgeting and forecasting is important because it helps organizations plan their finances effectively. Budgeting helps businesses estimate their expenses fairly accurately and thus, make the right business decisions related to finance, new hiring and other critical business areas. It also helps them in planning how, when and where their funds will be invested and offers some protection against unforeseen business emergencies. From the real estate perspective, lease forecasting and budgeting for lease expenses play a crucial role in helping both–landlords and tenants factor for the expenses related to the lease. Lease budgeting and forecasting is a small part of the overall budgeting process for an organization, but, when dealing with a large lease portfolio consisting of hundreds or thousands of leases, lease budgeting assumes a very significant role.

Lease budgeting tools: More than just spreadsheets

Talk about budgeting and the first thing that comes to mind is, spreadsheets: Complex cash flow predictions, ROI computations and assumptions all crammed into a spreadsheet. However that is fast changing, especially in case of lease budgeting, thanks to advanced lease management and lease accounting software platforms. These lease accounting and lease budgeting software allow you to-

-Get a 360-degree view of your leases and their key financial components

-Compute cash inflows and outflows in a few click

-Generate models and forecast lease-related income and expenses for a longer period of time

-Understand and make sense of complex lease data easily through visual means such as pie charts and bar graphs

What to consider when budgeting for your leases?

When preparing your lease budget, make sure you take the following items into account-

  • The key lease elements you want to budget for. There are various expense items/cash flows in a lease. 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.
  • Rely on the last few year’s actual amounts to prepare a budget with minimal variance. Looking at the actual lease portfolio expenses of last 3 or 5 years will help you prepare a lease budget that’s as close to the actual expense as possible
  • As with any other lease administration and accounting function, attention to detail is key when preparing your lease budget. Include forecasts for every single expense that you can account for.
  • Look at the last few year’s variance reports. Variance reports tell you the difference between your budgeted and actual cash flows. Learning about the variances over the years and understanding why they happened will help you prepare a more accurate lease budget.
  • Don’t forget to factor market forecasts and predictions. While it makes sense to rely on historical cash flow trends, also take into account market predictions for your lease locations. Market predictions can have significant impact on lease cash flows.

Resource planning for the budgeting process

Lease budgeting is time-consuming and labor intensive, even if you have the best lease accounting software at your disposal. Though it is not a continuous process, it needs to be done every year, in a timely manner. So, one thing for you to think through is, whether you have enough resources to devote to this process. Do you have an in-house lease administration or that can take care of your lease budgeting? Or are you relying on your accounting team? There are very specific lease elements to consider where you would need staff with lease analysis experience to weigh in. On the other hand, if you are relying on your lease administrators, you may end up diluting their focus from their regular lease administration tasks during the budget season. As a result, you may fall behind on maintaining your lease portfolio and keeping it up-to-date.  You could consider enlisting 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. A lease administration vendor who specializes lease budgeting will add a lot of value to your budgeting process through their expertise, industry knowledge and experience. Alternatively, you can outsource your day-to-day lease administration activities to them during the budget season and have your in-house lease administration or lease accounting team focus on lease budgeting while your lease administration vendor’s team of experienced lease administrators ensure you are always on top of your lease portfolio.

Why perform lease audits?

 

The term, lease audit, refers to auditing of a lease abstract in the light of the original lease documents. Lease audits are usually required if your lease abstracts are older and your leases have been amended or renewed since the original lease was abstracted. If the leases were amended or any addendums were made to them at a later date, you would want to ensure that the lease abstracts reflect the most recent information, which won’t be the case if the lease abstraction was done before the amendment/addendum was executed.

If you already have lease abstracts, it is time to take a good look at them and find out where you really stand in terms of their utility. Are your lease abstracts really serving their intended purpose? A lease audit can help you determine this and also identify the data lacunae and inaccuracies.

You could also commission lease audits if you are not satisfied with the quality of your existing lease abstracts. For example, 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.

Another good time to have your lease abstracts audited is when 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. 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.

However, lease audits are time consuming and this process not only requires a keen eye for detail but also a lot of patience and an in-depth understanding of lease accounting and lease language. The whole process of lease auditing is time-intensive and your existing resources may be too busy to invest their undivided attention into the audit. Partnering with a trusted lease abstraction service provider ensures your lease abstracts are 100% accurate, comprehensive and complete with no missing data. Getting an experienced and trusted lease administration services provider to audit your leases can also help by bringing to light any instances where critical lease data may have been missed out. A lease administration services vendor with enough expertise and perspective into the lease abstraction process will also be able to identify any shortcomings in your original lease abstract template. They can help you make changes to your lease abstract template so it is more comprehensive and captures the lease information that matters to you, going forward.

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.

Building an effective Lease Administration process

 

The lease administration process involves handling financial transactions such as rents, renewals, taxes, insurance and other expenses or income and making sure they are taken care of on time, ensuring all information is accurate and stored properly and sending notification of any missing information or late payments.

But for smooth operations and effective cost savings, an efficient lease administration process is vital. That said, lease administration can be a complex process and companies usually don’t realize that their lease administration process is broken or out of hand until it’s too late. Let’s look at some common problems –

  1. Maintaining data accuracy and consistency as and when leases are amended.
  2. Training existing staff or hiring new ones to function as lease administrators.
  3. Updating existing systems to ensure data is captured and stored in a more versatile & centralized system.
  4. Inability to provide real-time data to ensure critical dates for renewals and options are not missed.

The good news is that this situation is totally avoidable and reversible. This is how –

Lease administration team

Companies need to build a team of lease administrators – either by training their existing staff, hiring new ones with expertise or by simply outsourcing the task-  who can responsibly implement the lease administration process.

Lease administration software 

Companies need to invest in an efficient lease administration software to automate notifications, reporting, invoicing, quick access to important lease data, track and update changes. Here are some tips to choose the right lease administration software.

Timely action 

Protocols need to be identified and set in order to identify and fix any errors resulting from non-adherence.

Maintaining the integrity of the data 

Accurate lease data should be abstracted and maintained and proper quality review process needs to be implemented.

Accounting changes  

Companies need to be abreast with any changes in the accounting standards to ensure compliance with statutory regulations.

RE BackOffice can help you choose

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.

Whether it is one clause, one amendment or a whole lease agreement, we can do it for you.

Challenges in Lease Budgeting: Overcoming Complexity for Cost Savings

 

Lease budgeting can be a complex task, mainly due to various factors such as different payment structures, landlord responsibilities, lease components, and the need to reconcile estimated expenses with actual costs. However, by addressing these challenges head-on and leveraging the expertise of trusted lease administration vendors, businesses can streamline their lease management processes, optimize cost savings, and improve financial accuracy.

  • Different Payment Structures: Lease agreements often involve different payment structures, including fixed rent, variable rent based on sales or revenue, percentage-based rent, or a combination thereof. These varying payment structures can make it challenging to accurately project lease expenses and allocate budget resources. Businesses need to carefully analyze lease terms, historical data, and industry benchmarks to estimate and forecast these payment structures effectively. By leveraging advanced financial modeling techniques and incorporating lease-specific software tools, organizations can better navigate the complexities of different payment structures and gain a more accurate understanding of future lease costs.

  • Different Landlord Responsibilities: The responsibilities and obligations of landlords can vary significantly across leases. Some landlords may include property maintenance, repairs, and utilities within the lease agreement, while others may require tenants to cover these expenses separately. These variations in landlord responsibilities can impact budgeting.

  • Different Lease Components: Lease agreements often consist of multiple components, such as base rent, common area maintenance charges, insurance premiums, property taxes, and other miscellaneous fees. Each lease component may have its payment frequency and specific cost allocation methodologies. Accurately budgeting for these diverse components can be a complex undertaking, requiring detailed analysis and a comprehensive understanding of the lease agreement. By implementing robust lease administration systems and leveraging advanced reporting capabilities, businesses can streamline the budgeting process, track lease components efficiently, and identify areas where cost savings can be achieved.

  • Estimated vs. Actual Expenses: One of the common challenges in lease budgeting is reconciling estimated expenses with actual costs. Despite careful forecasting, unforeseen circumstances can result in budget variances. It is essential to regularly review and analyze actual expenses against projected budgets, identify discrepancies, and adjust future budgets accordingly. This proactive approach allows businesses to gain insights into potential cost-saving opportunities, refine budgeting processes, and improve financial accuracy.

Managing lease portfolios, especially large ones with hundreds or thousands of leases can be a resource-intensive task. To overcome the challenges of lease budgeting effectively, many businesses turn to trusted lease administration vendors for expert assistance. 

Cost Savings from Budgeting and Forecasting: Maximizing Efficiency through Lease Administration

 

Budgeting and forecasting play a crucial role in helping businesses anticipate expenses, plan for the future, and make informed financial decisions. One aspect of budgeting and forecasting that holds significant potential for cost savings is the management of leases, particularly different lease types like equipment and real estate. By understanding the nuances of these leases and incorporating them into budget plans, businesses can unlock substantial cost-saving opportunities. 

Different Lease Types: 

When creating a budget, it is essential to consider the various lease types that may impact expenses. Two common lease types are equipment leases and real estate leases. Equipment leases encompass leasing machinery, vehicles, technology, and other assets necessary for business operations. Real estate leases, on the other hand, pertain to office spaces, retail stores, warehouses, or any other physical premises required by the organization. By accurately budgeting for these lease types, businesses can avoid unexpected expenses and proactively plan for lease renewals or terminations.

Annual Increases to the Lease Portfolio: 

Lease agreements often include provisions for annual rent increases. These increases, which are typically tied to inflation or other factors, can significantly impact the budget. By incorporating these annual escalations into the budgeting and forecasting process, businesses can accurately project future expenses and plan accordingly. This foresight enables them to identify potential cost-saving opportunities, negotiate favorable lease terms, or explore alternative leasing options.

Estimating the Next Year’s Budget: 

Budgeting and forecasting require a careful analysis of historical data, market trends, and business goals to estimate the next year’s budget accurately. By considering all relevant factors, including leases, businesses can effectively allocate resources, identify areas for potential savings, and mitigate financial risks. When it comes to leases, organizations must take into account factors such as lease terminations, renewals, changes in rental rates, and any potential expansions or downsizing. By aligning lease management with budgeting practices, businesses can gain a comprehensive view of their financial outlook and optimize cost-saving opportunities.

Importance of Knowing Your CRE Portfolio: 

For businesses with a significant real estate portfolio, having a thorough understanding of the CRE assets is crucial for effective budgeting and forecasting. This knowledge allows organizations to identify underutilized spaces, evaluate lease expiration dates, renegotiate lease terms, or explore alternatives like subleasing. By streamlining the real estate portfolio and aligning it with the organization’s strategic objectives, businesses can reduce costs, enhance operational efficiency, and maximize financial resources.

Budgeting and forecasting provide businesses with a framework to plan, allocate resources, and identify cost-saving opportunities. By incorporating lease management into the budgeting process, organizations can proactively address the financial impact of different lease types, anticipate annual increases, and accurately estimate future expenses. Understanding the dynamics of the CRE portfolio is very important, as it enables businesses to make informed decisions, optimize space utilization, and negotiate favorable lease terms. Through effective budgeting and forecasting practices, organizations can achieve significant cost savings, enhance financial stability, and position themselves for long-term success in an increasingly competitive market.

Maximizing Cost Savings: Timely Rent Payments and Lease Administration

 

Timely rent payments are essential for tenants to optimize cost savings and maintain healthy landlord-tenant relationships. However, when rent payments are delayed or missed, it can lead to various financial and operational challenges. This blog explores the consequences of delayed rent payments, including holdover penalties, paying for vacant space, higher rates, penalties, and the potential loss of the leased space. We will also discuss the role of communication and documentation gaps in causing payment delays, highlighting the importance of ongoing lease administration and monitoring critical dates by a trusted lease administration vendor.

Consequences of Delayed Rent Payments:

Holdover Penalties and Paying for Vacant Space: When a tenant remains in a leased space beyond the lease term without formal agreement, they may face holdover penalties or be required to pay rent at a higher rate. Additionally, if the space becomes vacant due to delayed payments, the tenant may be responsible for covering the cost of the vacant space until a new lease is secured.

Higher Rates and Possible Penalties for delayed payments: Landlords may impose higher rates or penalties for late rent payments, negatively impacting a tenant’s cash flow and overall profitability. These additional expenses can quickly add up and erode potential cost savings.

Loss of Space and Insecurity: A failure to make timely rent payments may result in the loss of the leased space altogether. Landlords may terminate the lease agreement, leaving the tenant without a dedicated space and disrupting their business operations. Without a long-term agreement, tenants may also find themselves on a month-to-month basis, paying higher rents and lacking the security of a stable, long-term lease.

Lost Leverage in Landlord Negotiations for Renewal: When tenants have a history of delayed rent payments, it weakens their bargaining power during lease renewal negotiations. Landlords may be less inclined to offer favorable lease terms, such as rent reductions or additional concessions, due to concerns about payment reliability.

Forfeiture of Security Deposit: In some cases, landlords may have the right to utilize the tenant’s security deposit to cover unpaid rent. This not only results in the immediate financial loss of the deposit but also reduces the tenant’s financial cushion for potential future needs.

Causes of Delayed Rent Payments:

Communication Gaps: Poor communication between tenants and landlords, including delays in receiving invoices or notifications, can lead to missed or delayed rent payments. Misunderstandings or lack of clarity of lease terms and payment instructions can exacerbate the issue.

Documentation Gaps: Inadequate record-keeping and documentation can cause delays in rent payments. Missing or misplaced invoices, lease agreements, or payment receipts can lead to confusion and payment discrepancies.

Large Lease Portfolios and Manual Payment Processes: Tenants with extensive lease portfolios across multiple locations face the challenge of managing different payment frequencies. If the rent payment process relies on manual methods and lacks automation, it becomes easier for payments to slip through the cracks. With various leases and payment schedules to track, there is an increased risk of overlooking or missing rent payments if the process is not streamlined. Having said that, automating rent payments is not a foolproof process either. Reliance on automated payment systems can sometimes result in missed or delayed rent payments due to technical glitches, expired payment methods, or insufficient funds. Failure to monitor automated systems and ensure their proper functioning can create payment delays.

Engaging a trusted lease administration vendor for ongoing lease administration and critical date monitoring can help tenants avoid the pitfalls of delayed rent payments and maximize cost savings. Here’s how:

Timely Notifications: Lease administration experts ensure that tenants receive timely notifications and reminders regarding upcoming rent payments, eliminating the risk of oversight or missed deadlines.

Accurate Record-Keeping: Lease administrators maintain meticulous records of lease agreements, invoices, and payment history, minimizing documentation gaps and ensuring accurate payment processing.

Proactive Communication: Lease administrators facilitate effective communication between tenants and landlords, addressing any payment-related concerns promptly and maintaining a clear channel of dialogue.

Regular Lease Audits: Ongoing lease administration includes regular lease audits to identify potential payment discrepancies and address any communication or documentation gaps. This proactive approach helps prevent delayed or missed rent payments.

Making timely rent payments is vital for tenants to maximize cost savings, maintain positive relationships with landlords, and avoid financial and operational challenges. Engaging a trusted lease administration vendor ensures ongoing critical date monitoring, accurate documentation, proactive communication, and smooth payment processes. Proactive lease administration helps tenants avoid the pitfalls of delayed payments, safeguard their security deposits, and maintain leverage during lease negotiations for 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 17+ years, to leading retailers, REITs, property owners/managers, and corporate accounts seeking a strategic advantage. All client projects are performed in-house.