Lease administration, also referred to as lease management, is the process of collecting, maintaining, and reporting lease data; ensuring compliance; and maintaining healthy relationships with landlords, property managers, and other stakeholders of those leased assets. Some of the key components include:
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- Data Hygiene
- Critical Date Management
- Compliance
- Communication
- Accurate Reporting
Why is it Important?
An effective lease administration strategy is especially critical for companies that occupy many locations, like retail, restaurant, health and wellness, and automotive chains, to name a few. Leases are complex, ever evolving documents with legal, financial, and operational requirements. They need to be monitored and managed on an on-going basis.
Very often, occupancy costs – rent, taxes, utilities, insurance, additional rent – are one of the greatest liabilities of any organization so it’s important to keep a keen eye on those expenses.
Anyone familiar with the recent ASC 842 guidelines will understand the value of the “right to use” a leased asset. It’s just that – it’s a right; and rights are meaningful. Careful and strategic lease administration protects your rights and therefore, the value of your assets.
Technology in the World of Lease Administration
As in most all aspects of business and our lives, technology is playing an ever-increasing role in lease administration. It used to be that an organization with 25 locations could manage their leases with relative effectiveness using a combination of spreadsheets, document warehousing, and other basic tools. Law firms have always preferred providing lease abstracts in electronic document format.
Lease administration software (see Lease Administration vs Property Management) came on the scene around the millennium (see the evolution of lease administration software) and continued to improve over the next two decades. But spreadsheets were still an option…until the changes to Lease Accounting guidelines around 2019 (give or take a couple years based on your company’s structure).
For companies with more than a handful of leases, spreadsheets and word documents are no longer able to support the requirements of lease administration.
Limitations of Spreadsheets and Word Docs
AI has recently presented the lease administration arena with more power and more questions. In its relative infancy, AI is both exciting and scary. Many organizations are wondering how much, and in what capacity, they should incorporate AI in their lease management strategies. While there is certainly great value and potential for AI in our field, the complexity and dynamic structure of commercial leases limits the reliable use of AI for critical lease analysis at this time.
Lease Administration Best Practices
With over 25 years in providing lease administration software and service solutions, we can say with confidence that consistency is key. Your organization’s lease portfolio will likely be around way past your tenure, or at least the tenure of the talented people who are currently the keepers of your lease history knowledge. Without standard and consistent practices in place, the integrity of your data, organization of your documents, and relationships with key stakeholders are dependent and specific to the person in charge today. While that person may be the most experienced, loyal, and capable resource available to you right now, your commercial lease coverage will inevitably extend beyond the tenure of your people. That is why standards, guidelines, and QA are critical today.
There are so many more best practices that can be incorporated into your lease administration process, many of which will be covered in other articles here, but if you take away nothing else, please understand that consistency is key.
How to Develop Consistent Practices and Data and Decisions
It All Starts with the Abstract
Every report and decision is dependent on the information found in the initial lease abstract (see planning check list, template, challenges) This is what you need to get right. If the abstract is correct, and reporting and communication are in line, there should be very few “fire drills” and your team will be able to focus on optimizing your portfolio.
Abstracts, at the bare minimum, should include the Parties to a lease, the Term of the lease and related contracts, the Consideration due, and the rights and requirements of all parties. Because these are ALL dynamic updates, automation is helpful but human review is essential.
Be sure to incorporate these basic steps into your lease abstracting process:
- Define and document your company’s abstract standards
- Organize your documentation
- Read all relevant documents
- Extract required information
- Review for accuracy
Building Your Lease Management Team
Every organization is different but the requirements of managing a portfolio of leases is pretty universal. And there’s more to it than just paying the rent and keeping track of dates. Truly effective lease management requires a wide array of skills and experience and would ideally include:
- Lease administrators
- Paralegals and/or in-house counsel
- Lease accountants
- Occupancy cost auditors
- Real estate tax specialists
- Facility managers and utility specialists
- Site, valuation, and investment analysts
- Real estate, development, and project managers
If your company is large enough to staff all of these roles in-house, then your primary challenge is optimizing performance across specialties. But most multi-unit operators have just a few people filling all of these needs. In that case, it is important to tap into industry resources, subject matter experts, and software and service providers to fill in the knowledge and bandwidth gaps within your lease management team.
Key Take-Aways
In summary, lease administration is not just a set of tasks—it's an integral strategy crucial for managing one of a company's largest liabilities and assets. For businesses, particularly those with multiple locations such as retail chains or restaurants, the stakes are high. The introduction of technologies like AI and sophisticated lease administration software marks a significant advancement in how companies handle leases, yet emphasizes the need for meticulous management and strategic foresight. By prioritizing data integrity, standardized practices, and robust communication, organizations can protect their rights, optimize their lease portfolios, and prepare for future challenges. As we continue to navigate the complexities of lease administration, embracing both technological aids and human expertise will be key to maintaining control over commercial leases and ensuring organizational resilience and success.
- Essential for Multi-Location Businesses: Effective lease administration is critical for companies with multiple locations, such as retail and restaurant chains, due to the complexity and significant impact of leases on financial and operational strategies.
- Comprehensive Management Required: Lease administration involves not just tracking payments and dates, but also managing documentation, compliance, and communications with landlords and other stakeholders.
- Technological Integration is Transforming the Field: The adoption of lease administration software and potentially AI technologies marks a significant shift from traditional methods like spreadsheets, offering more robust and effective management solutions.
- AI's Role is Growing but Limited: While AI presents exciting opportunities for lease management, its current application is somewhat restricted by the complexity and dynamic nature of commercial leases.
- Consistency in Practices is Crucial: Establishing and maintaining consistent lease administration practices ensures the integrity of data and effective management across the organization's lease portfolio.
- A Team Approach is Beneficial: Effective lease management often requires a diverse team, including lease administrators, accountants, auditors, and real estate professionals, to cover all aspects of lease handling.
- Standardization of Lease Abstracting: Developing a standardized process for lease abstracting—defining company standards, organizing documents, extracting and reviewing information—is fundamental to maintaining accuracy and reliability in lease management.