Real estate lease management can help generate significant cost savings. Here’s everything you need to know about real estate lease management.
Real estate lease management is essential to ensure the success and profitability of a commercial real estate property. Whether you’re an investor, property manager, broker, landlord or tenant, efficient real estate lease management can help minimize expenses and maximize returns. This guide to effective real estate lease management will teach you everything you need to know to optimize your leases. In this guide, you will learn the following strategies:
The first step to effective real estate estate lease management is a desktop lease audit. A desktop lease audit is the process of error identification in your leases to ensure that you’re not over-paying for key expenses such as common area maintenance (CAM) charges, insurance or taxes.
Tenants should conduct a desktop lease audit regularly to ensure
the accuracy of landlord invoices and their compliance with the underlying lease. Since lease structures and payments can change over time, it’s critical to ensure that rental payments are accurate. For example, check that base rent, rent escalations and other performance metrics are calculated correctly.
Similarly, operating expenses can vary by lease and property. Both landlords and tenants should check invoices, payments and lease terms to ensure the pro-rata split between tenant and landlord has been followed properly. For example, here are some key terms to monitor to confirm invoices match the lease terms:
Conduct a desktop lease audit at least annually. The first audit is most important, since it sets the baseline to correct errors in calculations and payments before they compound.
Sometimes, a desktop lease audit is insufficient and a more comprehensive, full-scale lease audit may be necessary. Here are several examples that may trigger the need for a full-scale lease audit:
A full-scale audit is a more comprehensive type of audit than a desktop audit. During the full-scale audit process, it’s important to
review all leases, invoices and payment processes to ensure accuracy. Pay attention to invoicing errors such as:
Leverage automated technology to streamline lease management
administration, including rent calculations, invoicing and payment processing. This not only saves time but also reduces manual errors and ensures accurate financial data.
Lease management software also can be used to facilitate tenant
communication, maintenance requests and notifications. By leveraging technology, real estate investors, operators and property managers can improve efficiency, optimize cash flow, increase tenant satisfaction and gain a competitive advantage.
Your ability to optimize subleases is critical to improve efficiency and reduce costs. If a tenant has unused space due to staffing or operational changes, for example, a tenant may sublease that space to a third party.
In a sublease, a subtenant could pay rent directly to the primary tenant or the landlord. With multiple subleases, it can become difficult to track payments accurately, which can adversely impact accounts receivable. For example, each sublease can have a different rent amount, operating expenses, insurance and taxes.
To avoid billing accuracies and accounting errors, lease management is especially important when organizing subleases. Maintaining a
detailed schedule of each sublease, including lease terms and payment schedules, are critical to maintain best practices. Landlords should have separate billing processes for each sublease invoice. Ideally, the subtenant pays the landlord directly to ensure accuracy.
Commercial real estate leases can include incentives and allowances to help tenants offset the cost of the underlying lease. For example, a landlord could include an allowance for tenant improvement, which a tenant can use to remodel the leased space. Tracking tenant improvement allowances can be challenging, depending on how the
lease is written. For example:
Tenants should have a clear methodology to track available tenant improvement allowances as well as a schedule of availability. This includes, but is not limited to, reviewing the balances of tenant allowances. Similarly, landlords should have a clear process to track spending on tenant improvements, including invoice and vendor management.
Commercial real estate leases contain important dates, including the lease term, renewal options and termination options. Knowing the end of the lease term is especially important for landlords and tenants to understand. Why? A tenant could face financial penalties for staying in a property beyond the end of the lease term. Similarly, a tenant may not be able to move to a new property if the existing tenant hasn’t vacated the premises.
Tenants also could pay for a property after the end of their lease term if the tenant didn’t properly notify its Account Payables department
of the lease termination. If payments are automated or the landlord continues to send an invoice, a tenant could continue to pay rent despite not using the property.
Landlords and tenants should institute automated notification alerts to ensure that critical dates are known in advance. For example, alerts
should be established to notify landlords and tenants when a lease is near its expiration date and there is no option to renew, terminate or purchase the property. Automatic notifications also can be sent to the Accounts Payable department to ensure proper communication to end lease payments on a specified date.
Budgeting and forecasting are essential for any commercial real estate property. However, budgeting and forecasting for leases can be more complex. For example:
Since each lease is unique, every property can require a different pro rata split for expenses between the landlord and tenant. These accounting issues become magnified as landlords and tenants budget and forecast across multiple properties.
Maintaining and continually updating forecasts for each lease will help to ensure higher financial accuracy. Always compare invoices and payments with the underlying lease to gain a more accurate financial
understanding of total lease costs.
Effective commercial real estate lease management is a multifaceted process that requires a strategic and proactive approach. By conducting thorough lease audits, leveraging technology, optimizing subleases, and coordinating with accounting departments, real estate investors, brokers, landlords, tenants and property managers can optimize lease management and save money.
By integrating these best practices, real estate stakeholders can reduce errors, avoid overpayment and improve the long-term profitability of their commercial real estate properties.