Manage to Save

Guest Post by Rouben Alchoujian, President, Praedium Consulting

Most corporate occupiers – whether in office, retail, or industrial space – are now going down the path of reducing their footprint. Yet, even after shrinking, the leased portfolios will represent a very significant part of corporate expenses, requiring a careful, thoughtful management strategy.

Concurrently, identifying and monetizing savings opportunities in the leased portfolios is becoming increasingly important. An automated process of reviewing and recording the lease data in the portfolio and keeping it accurate and accessible (aka Lease Administration) helps identify overpayments and deliver the much-needed savings.

Lease Audit and Desk Audit

Both Lease Audit and Desk Audit are the most straightforward tools for delivering operational and other savings on leased Real Estate portfolios. To clarify the terminology, Desk Audit is the review of the Landlords’ annual operating expenses and real estate tax reconciliation invoices, and Lease Audit is a full review of the lease which includes the Desk Audit scope above, and much more. While it is not possible to estimate the savings generated by these tools for a particular lease, the industry benchmark is $0.50 – $5 per square foot. Experts agree that, for any given lease, more likely than not at least one instance of overpayment would be identified through such review, and the recoveries would be negotiated and delivered.

Interestingly, both Lease Audit and Desk Audit are being largely overlooked by corporate occupiers, for no apparent reason. Indeed, why not apply either of them to almost every lease in the portfolio? These services are either free (i.e., fully contingency based, like Lease Audit), or are priced at an hourly consulting rate (requiring only a few hours of review). A concern over hindering the relationship with the Landlord may have been valid years ago. But now that the processes have been ironed out, both Tenant and Landlord are likely to benefit from increased transparency in the relationship. Yet, surprisingly few occupiers utilize Lease or Desk Audit on a regular basis, thus not seizing very attainable savings opportunities. 

Rental Payments

Paying rent may seem to be a well-defined activity under the lease, yet a thorough review of payments’ history could be an eye-opening experience. Here are some areas where overpayment of rent routinely occurs in commercial leases:

• Rent-free period(s) – have they been accurately captured and have the payments been adjusted accordingly? Often rent-free periods occur later during the lease term and are therefore easy to miss.
• Annual rent indexation – has it been calculated correctly year over year, considering different ways of defining CPI in the leases?
• Security Deposits – have they been collected on every expired / terminated lease in the portfolio?
• Rent commencement: have any payments for the space been made outside of the payable time period specified in the lease? This may relate to Lease Commencement date vs. actual occupancy, Landlord’s and Tenant’s works in the premises, and other similar provisions.

Critical Dates Management

Almost every Lease Administration professional knows of at least one company who had incurred significant cost – sometimes in the order of hundreds of thousands of dollars, and up to millions – to mitigate the ramifications of missing a critical date (most often a lease renewal). For obvious reasons, the specifics cannot be openly shared and therefore those stories remain anecdotal evidence. If more of this became public, the importance of managing critical dates would have been so widely recognized that every portfolio manager would deploy a professional Lease Administration program only to have this aspect covered, if for nothing else. Indeed, failure to timely notify the Landlord of the intent to renew the lease results in losing the leverage in renewal negotiations. The best-case scenario here is being locked in higher rent for the remainder of the term, and the worst-case scenario is losing the premises.

While renewal options are the most well-known type of critical dates, there are also others – commencement date, expiration date, rent step-up dates, expansion and contraction notice dates, and more. Keeping them under control is another important way of avoiding overpayments and mitigating lease-associated business risks.

Other Opportunities

TI (Tenant Improvements) Allowance is a standard lease provision and a great way for the Landlords to sugarcoat the pain for the tenant of taking on the expense of a multi-year – often, multi-million-dollar – lease. The traditional lease language for this clause, though (including associated timing) is such that it is much easier to overlook this provision, thus losing significant monetary benefit, than to exercise it. A well-designed and supported tracking system for TI Allowances would help identify and recover the owed amounts.

Managing the lease data and keeping it accurate and up to date also allows the occupier to uncover other opportunities such as those related to late rent payment fees, premises size changes, lease overhold (holdover), and other provisions.

Summary

The key opportunities for savings on leased portfolios are typically related to rental payments, critical dates management, TI Allowances, and some other areas in the lease agreements. Desk Audit is a perfect tool for finding overpayments of operating expenses and realty tax, and Lease Audit provides even more significant opportunities through detailed review of all aspects of the lease – on average, between $0.50 – $5 per square foot.

All the above typically becomes possible through a professional Lease Administration program, which is a great way for corporate occupiers to not only keep their finger on the pulse of what’s happening in their leased portfolios, and make data-based decisions, but also identify and deliver significant savings.