When we are verifying rents at a property, we do all of our calculations – prorata shares, caps, breakpoints, CPI calculations, lease year language applications and so on – prior to looking at what the current landlord has done. I don’t know about you, but I can be fairly easily led by what someone else has done because, well yes, it does make sense. But, doing the calculation first forces you to calculate what you believe is right. The current owner’s calculations then become a kind of answer key. If I calculate what the landlord had calculated, then we are good.
However, if I calculate one amount, and a landlord has calculated another, I have an opportunity to either correct my calculation, or correct theirs. This act of reconciling the billings (or even just verifying the abstracts) is where so much opportunity lies.
Because there are thousands of details per lease, and sometimes hundreds of charges per tenant per year, this industry has a tendency to “do it the way we did it last year.” If a mistake was made, it is perpetuated throughout the term of the lease. If an interpretation of a lease clause or application of lease language may have been made incorrectly , again, it is perpetuated through the lease term.
Someone applies a cap after a first partial lease year to a partial year charge instead of an annualized first year charge. Then the third is calculated off of the second, the fourth off of the third. In those subsequent years, the cap is being applied correctly, but off of an incorrect charge.
A lease defines outparcels as excluded areas, and any pad is set up as an excluded area. Once and done. No one will question that prospectively. But, what if the lease defined “outparcel” as any premises not fronting on the enclosed common area. That issue is perpetuated.
If I review a landlord’s calculation and see that outparcels are excluded, I can easily see that language in the lease and concur with their billing. But, if I read the lease first, I am absolutely going to see that “outparcels” also include non-fronting. I will calculate the charge excluding not only those pads, but the non-fronting areas as well. And, after I have done my calculation, I will see that my calculation and the landlord’s calculation varies. And, right there is where you find the upside.
In a world of “do it the way we did it last year,” our method is brutally, truly brutally, time consuming.
But, honestly, with this method, there is money. There is always money.
2 thoughts on “An approach to lease administration and due diligence”
Clorida’s Lease management system enables you to take control of your business, inventory, renewal and maintenance cycles. User friendly, and comprehensive.
Every company that deals in commercial real estate leases – whether a landlord or a tenant – should have a robust lease management system, and there are some good ones out there (I am not familiar with Vinser) that can do a great job administering the information in the system. Key to any of those systems is getting accurate information in the lease management system to begin with. For example, if a lease commences November 1, 2019, and there are 3% increases to rent every Year (Year capitalized), the first increase date could numerous different dates depending upon the definition of “Year.” I would expect that with Vinser, if you can ensure that the information getting into the system is accurate, the results are what you had expected.