Lease administration can be a time-consuming and complicated task for the real estate businesses dealing with commercial property documents and lease agreements. With the high volume of records handled by commercial real estate businesses, capturing critical information from all the lease documents is more challenging.
Every real estate business requires lease administration support to review and abstract details from lease documents and manage the database.
A proper understanding of the lease agreement and its technical terms by both parties can establish a mutual understanding. The agreement can act as the codebook based on which the business works between two parties.
This guide broadly uncovers the riskiest tasks performed under lease administration. Let’s understand more about lease administration and its importance in real estate.
Why is lease administration important for commercial real estate businesses?
Lease administration, otherwise referred to as lease management, is the day-to-day execution of collaborative tasks to manage a company’s portfolio efficiently. Lease management handles crucial administrative functionalities, lease tracking, and auditing.
Lease administration ensures that lease agreements are illustrated adequately for the benefit of two parties. The entire process ensures that both the tenants and the property owners/landlords adhere to their obligations, knowing the lease terms, clauses, and conditions stated in the agreement.
You can leverage the lease data points to maximize efficiency and minimize risks by using an effective lease administration strategy for your real estate business.
Types of Commercial Leases
Commercial real estate leases come in different forms, and each type has its terms and conditions associated with either of the two parties.
For this type of commercial lease, the tenants pay the base property rent. The property owners take over the property operating expenses, including other property expenses of the tenant such as property insurance, common area maintenance expenses, utilities, and property taxes.
The difference between the full-service gross lease and the modified gross lease is that tenants pay the base rent and share a portion of property operating costs such as utilities and cleaning services in the modified gross lease.
NNN lease, otherwise known to be a net lease or triple net lease, requires tenants to pay all the operating expenses of the commercial property for the lease.
What is Lease Abstract?
Commercial real estate leases are always lengthy and complex documents. The process of extracting valuable and critical information from the lease agreement is known as the lease abstraction process.
A lease abstract is a precise, convenient, easy-to-understand, collective summary of information from a lengthy document to a presentable structure of key lease points.
A lease abstract summarizes tenants, landlords, and investors’ crucial legal, financial, and business information. In short, a lease abstract is a condensed version of a lengthy commercial lease document.
Benefits of automated lease abstraction
The initial process of lease administration involves abstracting the legal information/clauses from the agreement and reviewing them closely to highlight crucial and term-mentioned points.
A manual approach for abstracting important points from lease documents can be time-consuming and subject to human error. Also, commercial leases are often complicated with lengthy documents and require more manual support for abstraction.
Automated lease abstraction can help you overcome this challenge and be a simple solution to abstract data points instantly.
Lease abstraction powered by AI/ML technology provides a detailed summary of the essential critical points from documents that can help you to track important dates, set reminders for the deadline or renewal periods, and access any details whenever required.
What are the details abstracted from Lease documents?
While the structure of the lease abstract may vary from one realtor to the other, the information displayed in the document remains the same as listed below:
A properly derived lease abstract will also include the following information:
- Security deposits
- Common area maintenance taxes and charges, including recoveries
- Concealed termination clause
- Distinctive use clauses
- Required hours of operation
Complete set of tasks under Lease Administration
Once key terms are abstracted from the commercial leases, the cardinal work of managing data falls in line; the critical tasks associated with lease administration are as follows:
Abstracting the lease: Lease abstraction involves understanding the key clauses and commonly mentioned information in commercial leases. It is the first level of reviewing the lease agreement and summarizes essential legal, financial, property, and business details.
Keeping up with the critical dates: Missing actual dates on the timeline can cause severe financial and legal consequences. The primary task involved in lease administration is to stay updated on the dates related to renewals, termination, rent increases, and insurance expiration.
Understanding tenant/Landlord liabilities: A carefully derived lease should mention the responsibilities of both the parties, including property maintenance operation, common area space, and financial details including audits, insurance pay-outs, payment delivery, etc.,
Managing property expenses and recoveries: A minimal understanding of common lease clauses could improve the property’s net operating income and provide better customer service. The mutual relationship between tenant and property manager is frayed when either party fails to understand the clauses mentioned in the agreement, like the property operating expense or tenant share of property expenses. An accurate analysis of the tenant’s pro-rata percentage calculation can cover all the costs and rationalize the amount.
Track insurance certificates: Tracking insurance means confirming that tenants had proper insurance coverage as specified in the lease document. It also indicates that the tenant is insured by a reputable insurance company.
Understanding and abstracting key lease points from the commercial lease agreement is not easy. Lease abstraction and lease administration are increasingly challenging for all commercial real estate businesses.
A best-in-class lease management solution could ease the complexities involved in the workflow. It is no wonder that many real estate firms are opting for automated and experienced professional support to manage their portfolio effectively.
If you are a commercial realtor or investor looking for exclusive support, we are glad to help you with our lease administration services.