A summary of the key financial, business and legal information that exists in a commercial real estate lease. It should bring to the reader’s attention any unusual lease provisions, financial obligations or other issues of import.
The complexity of commercial property transactions has augmented the complexity of leases. However, the purpose of the lease abstraction remains – to cull out the important highlights of the long-winded lease agreement and state them simply and clearly for the understanding of landlords and tenants. It becomes the document property managers, leasing agents and others go to without having to trudge through the original document, and can also be referenced and re-negotiated from at later dates. The import of the lease abstraction can be seen in the following reasons.
The type of lease varies for each property and commercial establishment. Nevertheless, the basics components remain:
- Basic information [name of tenant and landlord, space being rented, amount of square footage]
- Terms of the lease
- Base rent and percentages [pro-ratas, CAM etc.]
- Clauses [documents stating rights, modification of terms etc.]
Premise for the lease abstraction:
- For spot on lease renewal
- So you know when it’s expiring
- You understand whether they have an option in between
- To manage the lease expiry/renewal cycle etc.
- It is all the more important when you’re a larger company and have more volumes, and thereby more leases to abstract.
- The financial impact when it isn’t set-up correctly is premonitory. [For instance, let’s say (based on the lease agreement) the late fee date is set-up incorrectly for the 10th of each month instead of the 05th. Then with people paying between the 05th and 10th, you lose out on the money from the potential late fee. Conversely, if the late fee deadline is set for the 05th of each month instead of the 10th, the client bears the brunt of having a shorted deadline.]
- It is required for financing purposes and for a due diligence, when a buyer wants to purchase a property and must review the status of the lease. Evaluating the lease abstraction instead of the lease itself is cost and time effective, unless the lease abstraction is direfully erroneous.
- The lease abstract is there because some leases can be brief but technical, some easy to understand but lengthy, and some can be re-negotiated with sub-clauses and multiple appendices, thereby allowing for some important point to get missed out on. However, if the summary is itself amiss, you use the same mistake in all further dealings and risk facing legal trouble.
How to help yourself:
Set-up the details of the lease and the lease abstraction on your real estate software. Making the abstract machine readable and computerized is a lot of work, but in the grand scheme of things, it saves you from shuttling back and forth between countless documents later on, reduces human error in entering and re-entering data, and assists the whole process when used in conjunction with other workplace facilities. Yardi is one of the software that provides the facility for this.
This can be done by enlisting professional help. For a smaller company (SMB) a trained accountant can do it. They must have good experience though because it requires specific skills to meticulously draw out the clauses, numbers and so on. Bigger companies hire professional to do it, or have a team for it. In such scenarios, it usually makes sense to outsource the task. Real estate accounting companies that do such undertakings are exceptionally skilled in the job, given that they handle the outsourced job as a part of the main functions they work with and would have performed many such jobs before. Thus, they can handle it much better. Using attorneys or third party services is also a clever thing because they are insured against errors.
But at the end of the day, however you choose to get it done, the important thing to remember is ensuring the lease abstraction is done and done properly in order to manage your real estate portfolio smartly.