Tag: Lease administration software

Lease Administration: Understanding the Basics and Best Practices

 

Lease administration is the process of monitoring and managing lease agreements to ensure all critical obligations, especially, financial, are fulfilled in a timely and accurate manner. Examples include rent payments, lease renewal, notice requirements, compliance management, etc. This blog discusses lease administration from a tenant’s perspective and the various elements that are a part of it.

Key Elements of Lease Administration

Lease Abstraction: Lease abstraction is the process of summarizing critical financial and non-financial data from lease agreements. Examples include lease terms, rent amounts, renewal options, key dates, etc. Lease abstraction is the first step in the lease administration process as it provides easy access to key lease data which is very important for on-going lease administration.

Managing rent payments: As a tenant, it is important to ensure that you make your rent payments on time and are aware of any late fees or penalties. Lease administration involves managing rent payments, which includes tracking rent payment due dates, having payment reminders and ensuring the rent is paid on time so as to avoid any penalties such as late payment charges. Your lease administration team is also is responsible for reviewing the lease clauses related to rent increases and confirm if the rent amount increases 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. 

CAM Reconciliation: Common area maintenance (CAM) reconciliation is perhaps one of hte most crucial lease administration tasks. CAM charges refer to the costs associated with maintaining and operating shared spaces of the rented property, such as lobbies, elevators, parking lots, and common areas in multi-tenant buildings. However, CAM charges are not fixed and can vary from year to year, based on actual expenses incurred. This is where CAM reconciliation comes in – it is a process that ensures that tenants only pay their fair share of the CAM expenses, based on the actual costs incurred by the landlord. CAM reconciliation is considered as a significant element of the lease administration process as it serves as an important tool for maximizing lease portfolio savings.

Lease Renewal: 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. 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. As a tenant, it is important to be aware of the lease renewal process and any changes to lease terms that may occur. Lease renewal is an essential part of lease administration.

Estoppel certificate processing: An estoppel certificate is a legal document that outlines the key terms and conditions of a tenant’s lease agreement and confirms that the information provided is accurate and true to the best of their knowledge. It is typically used by landlords in discussions with potential buyers or lenders seeking to secure a loan with interest in the property. The responsibility of creating estoppel certificates usually falls on the tenant. Tenants are typically given a window of 10-20 days to submit the estoppel certificate to their landlord, and the lease administrators within the tenant’s organization are responsible for processing the estoppel notice promptly.

Security deposit management: As a guarantee for fulfilling lease obligations, tenants pay a lump sum amount known as a security deposit to their landlords, which is usually refundable at the end of the lease term, assuming the property remains undamaged and all lease obligations are fulfilled. It is the landlord’s responsibility to return the security deposit within the timeframe specified in the lease, and failure to do so may result in the landlord being liable to pay a penalty to the tenant. It is your lease administration team’s job to follow-up with your landlord to ensure that your security deposit amount is received on time and is accurate. 

Commencement date letters: The management of commencement dates and rent commencement dates are critical tasks for lease administrators. Tenant lease administrators are responsible for reviewing the lease commencement letters received from landlords and ensuring the information therein is accurate. They are also responsible for updating the information in the lease administration software platform of the tenant. 

Liasoning services: Liasoning with the /landlord/other parties for lease-related processes and ensuring such processes run smoothly and are taken care of on time is also an important element of lease administration.

Outsourcing lease administration can be an excellent option for tenants who do not have the time or resources to manage their growing lease portfolio effectively. By outsourcing, they can benefit from the expertise of experienced lease administration service vendors who have the knowledge and tools needed to efficiently manage large lease portfolios. Outsourcing can also reduce the risk of errors and ensure compliance with lease agreements, saving time and money in the long run. 

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.

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

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. 

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.