When managing your commercial real estate leases requires more than a spreadsheet

By John Jarvis

As a business owner, you sign and file away hundreds of contracts with thousands of details as you try to stay focused on growing your business. If you have a real estate lease for the business, it likely sits in a hard copy folder in your credenza, and you pull it out when needed to remind yourself of key provisions. If you have three real estate leases, you likely have some of those key provisions listed in an Excel file for easier reference—things like the lease expiration date and the rent schedule. And if you have 10 or 12 or 15 real estate leases? At some point, you will have outgrown Excel, and the risk of a costly mistake or oversight warrants a better system, like an outside lease administration provider. Let’s dig into what that means.

An experienced portfolio and lease administration partner starts by abstracting your real estate leases to identify key provisions, dates and negotiated lease language—in which these elements are then entered into a purpose-built software tool for managing real estate information. Examples of information to be tracked can include additional details beyond basic lease elements such as key dates, like a sunset provision for your tenant improvement allowance, after which you are no longer entitled to your tenant improvement allowance. With such an onerous ‘use it or lose it’ provision, we want to be tracking that date well in advance, as it takes time to spend that allowance on design, permitting and construction activities. Another key date can be the first and last date to exercise a renewal option. As long as you have a renewal option, you have rights to remain in your space and you can’t be kicked out, even if Apple moves in next door and now wants to take over your space. Often, security deposits will have been negotiated with scheduled reduction dates as the lease matures and the landlord’s risk exposure is reduced over time. With one lease, you might remember these important details, but as the number of locations grows, the complexity grows exponentially.

So, what number of site leases becomes the tipping point, where Excel is simply no longer adequate? In part, this depends on whether your company has a dedicated team member to oversee the leases, whether a facility manager, a controller or an administrative manager. And even with a dedicated employee, I believe the magic number is approximately five site leases, after which the risk of a costly mistake or oversight far outweighs the cost of basic third-party lease administration.

What’s more, when a business has one or two leases, there is a tendency to drop them in the file and forget about them until you are approaching the lease expiration date. When in reality, there is a lot that happens and a lot that needs to be managed between the commencement date and the expiration date of your lease. Ongoing property operating expenses are a great example of this. At the beginning of every year your landlord will send you a budget of property operating expenses for the coming year, and at the end of the year they will send you an expense reconciliation statement, asking you to make up any shortfall. Maybe you have the time to dig into these numbers, and all too often tenants simply write the check. Your lease administration team reviews the operating expenses every time, and of course they take the time to cross references against the negotiated language of that particular lease to confirm, for example, whether a cap on controllable expenses has been applied or whether the landlord’s ‘cost pools’ are being calculated correctly.

Or maybe you get an estoppel letter from your landlord, asking you to confirm and affirm the key provisions of your lease, either because they are refinancing or selling the property. The tricky thing about estoppel letters is that if they contain inaccurate details, once you sign it, those details will now supersede the language of the lease. You bet you’re going to want to review carefully any estoppel letter. Or you can rely on your lease administration partner who knows your lease terms inside and out. There is something deeply comforting when I see a monthly report for all of my client’s property leases, a report that identifies all upcoming key dates and documents any outstanding issues, a report that confirms tasks that are supposed to have been completed and reminds us all about what is coming up next.

Microsoft Excel is a wonderful tool. But it is no match for a team of real estate professionals using purpose-built software for tracking multiple, complex real estate leases and the various, nuanced issues that arise on a month-to-month basis over the life of a lease. If you have five or more real estate leases, it is time to trust the pros to track those lease details—time to move beyond Excel and focus instead on accelerating the growth of your business.