LEASE ADMINISTRATIONLEASE ADMINISTRATION

COMMERCIAL PROPERTY

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What to expect from What to expect from today…today…

An insight into lease administration

How lease administration affects your company

For some, this will be a refresher. For others, you may learn something new.

Make your work easier!

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Morning AgendaMorning AgendaLease Abstracting

◦ Lease Terminology –What does it mean?◦ Retail v. Office Leases ◦ Lease interpretation◦ GSA Leases

Recoverable Operating Expenses◦ What a tenant pays and why◦ Types of Recoveries◦ Recoverable operating expense issues to

be avoided◦ Handling a tenant’s audit

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Afternoon AgendaAfternoon AgendaWhat reports or information is a

tenant obligated to provide and when?◦ Gross Sales◦ Insurance◦ Financial Statements

What do your co-workers need to know?◦ Educating to enable them◦ Lessening your workload◦ How lease administration information is shared

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Lease AbstractsLease AbstractsThorough review and analysis of lease

document◦ Term

Renewal options Early termination options

◦ Rent Increases throughout the term Free rent

◦ Expense recoveries Estimated expenses Any caps or limitations Gross up provision Base years

◦ Security Deposit◦ Parking Rent

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Lease TerminologyLease Terminology

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Operating Expense Operating Expense TerminologyTerminology Pro-rata (proportionate) share –The tenant’s rental area in

relation to the building’s entire rentable area. May be a fixed number or a shifting number.

Estimates – Most leases will allow a Landlord to charge a monthly estimate based upon the annual amount the Tenant would be projected to owe for that year.

Exclusions – Certain operating expenses that a particular tenant does not pay (elevator expenses for a retail tenant on ground floor).

Reconciliation – the comparison between actual operating expenses, a Tenant’s Base Year (if any) and the estimates paid by tenant.

Gross-Up – adjustment of operating expenses to compensate for building vacancy.

Caps – a limit on the ability of the Landlord to increase certain expenses that are payable by a tenant. May be a singular expense (mgmt fees) or a group of expenses (i.e. controllable expenses). Example: “ . . . but in no event shall Expenses increase by more than 5% over the prior year’s Expenses.”

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Office v. Retail LeasesOffice v. Retail LeasesGross Sales reporting and

Percentage RentUtility recoveriesBase Year vs. Net/Retail recoveryOffice Expenses

◦Window cleaning◦Janitorial services

Retail Expenses◦Trash removal

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Who is reading the Lease?Who is reading the Lease?LawyersBrokersProperty managersAccountantsProperty ownersYou

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Lease Abstract IngredientsLease Abstract IngredientsList of all lease documents

(amendments, assignments, estoppels)

Guarantors (if any)Tenant Storage Space or RentsTenant Options (renewal,

terminations, ROFR, ROFO)

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Lease Abstract: ExampleLease Abstract: ExampleBASIC LEASE INFORMATION

 Lease Date: October __, 2005

Landlord: IREM OFFICE PROPERTIES, L.P., a Delaware limited partnership,

Tenant: DEWEY, CHEATHAM & HOWE, LLC, a Virginia limited liability company,

Project: Those certain buildings having a street address of 1200 & 1300 King Street, Alexandria, Virginia

Building: All land and improvements situated at 1200 King Street, Alexandria, Virginia

Section Page Section 1.1. 3 Premises: The Second Floor of the BuildingSection 1.2. 3 Rentable Area of the Project: 30,246 square feetSection 1.2. 3 Rentable Area of Premises: 4,124 square feetSection 2.1. 3 Term Commencement Date: November 1, 2005Section 2.1. 3 Term Expiration Date: October 31, 2010

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Lease Abstract: Example Lease Abstract: Example (Cont.)(Cont.)

BASIC LEASE INFORMATION (continued)

Section Page

Section 3.1. 6 Rent:

Annual Annual Base Rent per MonthlyPeriod Base Rent Rentable Square Foot Base Rent

11/2005 - 10/2006 $129,906.00 $31.50 $10,825.5011/2006 - 10/2007 $133,803.18 $32.44 $11,150.2611/2007 - 10/2008 $137,817.27 $33.42 $11,484.7711/2008 - 10/2009 $141,951.78 $34.42 $11,829.3211/2009 - 10/2010 $146,210.33 $35.45 $12,184.1911/2010 - 12/2010 $150,596.63 $36.52 $12,549.72Advance Rent: None

Section 4.1. 6 Base Year: Calendar Year 2005Section 4.1. 6 Tenant’s Percentage Share: 13.64%Section 6.1. 10 Security Deposit: $10,000.00Section 7.1. 11 Use: General office purposes

 

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Lease Abstract: Example Lease Abstract: Example (Cont.)(Cont.) BASIC LEASE INFORMATION (continued)

Section Page

Section 29.1. 25 Tenant’s Address for Notices: THE PREMISES Telephone: 202-555-9999Facsimile: 202-555-9998

Section 29.1. 25 Landlord’s Address for Notices: 1625 Pennsylvania Avenue, Ste. 100Washington, DC 20011Telephone: 202-555-7171Facsimile: 202-555-7575

 With a copy to Property Manager: Ernst & Associates

1300 Delaware Avenue, SWWashington, DC 20024Telephone: 202-555-1212Facsimile: 202-555-1234

Section 34.11. 29 Landlord’s Broker: Washington Realty

Section 34.11. 29 Tenant’s Broker: Virginia Realty16500 Tysons Blvd., Suite 500McLean, VA 22102

  In the event of any conflict between this Basic Lease Information and the other terms of this Lease, the other terms of this Lease shall control.

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GSA LeasesGSA LeasesMany Parts!

◦ SF2◦ Cost Statement◦ Solicitation for Offers◦ General Clauses

Key Provisions –Tax assessments, receipts, and billing, base rate for operating costs, Landlord’s renovation obligations, and Tenant’s overtime utility usage.

Supplemental Lease Agreements

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RecoveriesRecoveries

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Recoverable Operating Recoverable Operating ExpensesExpensesReal Estate TaxesCleaningRepairs & MaintenanceUtilitiesInsuranceGeneral & AdministrativeProfessional Fees

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Tax RecoveriesTax RecoveriesWhat comprises taxes?Base Years during construction periodsCo-tenancy requirementsPro-rating taxes at a mixed

development (office, residential, retail)Limits on tax recovery due to property

salesWho gets the bill?

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Non-Recoverable Operating Non-Recoverable Operating ExpensesExpensesMarketing & PromotionSalaries for non-property

personnelGround Lease ExpensesOwner’s Expenses

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Types of ExpensesTypes of ExpensesControllable Expense (landscaping)Uncontrollable Expense (utilities, insurance,

taxes)Fixed Expenses don’t change by occupancy

(taxes)Variable Expenses fluctuate with occupancy

(cleaning)Recoverable Expense (landscaping, security)Non-Recoverable Expense (attys fees,

marketing)

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Types of RecoveriesTypes of RecoveriesNet/Retail Lease –Tenant pays their

proportionate share of annual operating expenses.

Base Year –pro rata share of expenses which exceed a particular years’ expenses.◦ Fiscal Year vs. Calendar Year?◦ Are the Base Years for Taxes and operating

expenses separate or combined?Expense Stop –Expenses beyond a certain

level are reimbursed by the Tenant. May be applied to specific expenses.

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Recoveries -Where do you Recoveries -Where do you start?start? Get a year-end General Ledger from accounting and review the expenses in each account, pulling out what is not recoverable or applicable to that billing year

Obtain tenant billing histories –confirm what tenant was billed as estimates vs. what they actually paid.

Keep an occupancy schedule, gross up calculation and historical expense analysis.

Calculation Sheet –Each tenant should receive a calculation sheet which shows how the expenses for the current year relate to the base year amount (if any), what the tenant’s proportionate share is and what the remaining amount due (to or) from the tenant once the estimated payments have been subtracted from the proportionate share of expenses.

Letter to Tenant –a cover letter should accompany the calculation, with any explanation of why expenses may have increased/decreased, also with instructions for any refund or payment to be made.

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Operating Expense Operating Expense ReconciliationReconciliationCase Study

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Operating Expense Gross Operating Expense Gross UpUpCleaning Expenses were $34,517.00

at 90% occupancy, what would they be at 100% occupancy?

$34,517.00 / 0.90 = $38,352.22

Utilities were $195,052.00 at 90% occupancy, what would they be at 95% occupancy?$195,052.00 / 0.90 x 0.95 = $205,888.22

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Drafting a ReconciliationDrafting a Reconciliation Acme Corp. has a 10% pro rata share and a 100%

gross up on variable expenses such as utilities, mgmt fee and cleaning. The building occupancy was 90% and taxes are calculated separately from other operating expenses. Draft a year-end reconciliation based upon these actual expenses:

Cleaning - $ 90,000 Utilities - $180,000 Insurance - $ 35,000 R & M - $150,000 Genl & Admin - $100,000 Mgmt Fees - $ 45,000 Taxes - $200,000 TOTAL $800,000

NOTE: Tenant occupied building for the entire year.24

Drafting a Reconciliation Drafting a Reconciliation Pt. IIPt. II XYZ Corp. has a 10% pro rata share and has a Base

Year for taxes of $150,000 and for operating expenses of $500,000. Draft a year-end reconciliation based upon this tenant occupying for only half the year:

Cleaning - $ 90,000 Utilities - $180,000 Insurance - $ 35,000 R & M - $150,000 Genl & Admin - $100,000 Mgmt Fees - $ 45,000 Taxes - $200,000 TOTAL $800,000

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Handling a tenant reconciliation Handling a tenant reconciliation auditauditIs the tenant entitled to an audit? What are the terms of an audit? Are your expense records in

order?Does the reconciliation match the

lease?Do you have the authority to

negotiate?

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Tenant Reporting Tenant Reporting ObligationsObligations

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Gross SalesGross SalesHow often does the tenant report?How much is the tenant making?Who needs to know?

◦Property Managers◦Owners◦Brokers

Is Percentage Rent Due? When?Is the tenant in trouble

(financially)?

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Gross Sales Case StudyGross Sales Case StudyIt is January 2005, you have just

received Super Hair Salon’s annual gross sales report for 2004. Calculate their percentage rent owed (if any) . . .

$155,000.00 Gross Sales-$150,000.00 Breakpoint $ 5,000.00 x 5% Percent Rent $250.00 Percentage Rent Owed

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Tenant Financial Tenant Financial StatementsStatementsDo you have them?Request if tenant is in trouble . . .

◦Low gross sales◦Delinquent rent payments

How to requestWhat you are looking for,

independent research

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Certificates of InsuranceCertificates of InsuranceWhere to keep them

◦Lease File◦Three ring Binder

Are they accurate?◦Coverages and additional insureds

correct?Are they current?

◦How to track on a calendar system

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Tenant BillbacksTenant BillbacksOvertime HVACBilling for Repairs –is overhead

included?Who maintains HVAC?Security Clearance CleaningPest Control

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Enabling Your OfficeEnabling Your OfficeWhen looking at a lease, do they know what

it means?◦ Make sure co-workers understand lease

terminology◦ Do they know how their work affects yours?

Brokers Accounting

Becoming more efficient◦ Are documents and records in your office

organized so they can be found quickly? Accounting records Annual expense reconciliations should be kept in the

tenant’s lease file.

Where does information need to be reported?

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Lease Information: Where is it Lease Information: Where is it stored stored (Records/Database (Records/Database

Requirements)Requirements)PORTFOLIO #1

Lease Abstract Critical Dates

Spreadsheet ARGUS Models Gross Sales Kardin

Budgeting Tenant Address

List Yardi

PORTFOLIO #2 Lease Abstract Critical Dates

Spreadsheet Website OPEX

Calculations Kardin

Budgeting MRI LLQtrly

Correspondence Folder

PORTFOLIO #3 Lease Abstract Critical Dates

Spreadsheet Stacking Plans Gross Sales Kardin

Budgeting OPEX

Calculations RealPage

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Lease AdministrationLease AdministrationSharing information with co-

workers◦Information that you control◦Don’t get hit by a bus!◦What can you provide to co-workers

at their desktop so they don’t have to come see you?

◦Can you take time off? Disconnect?

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1st Quarter

Jan. to March OPEX

reconciliations

Gross Sales Annual Reports

2nd Quarter

April to June Lease File

cleanup Updated

Abstracting Training

Vacation!

3rd Quarter

July to Sept. Budgets

4th Quarter

Oct. to Dec. Estimated

OPEX Notices

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Lease Information: Updates Lease Information: Updates (Records/Database Requirements)(Records/Database Requirements)

Success! Success! What Does Good Lease What Does Good Lease

Administration Mean to You?Administration Mean to You?

1. Tenant/client calls handled in real time

2. No tenant questions/rebuttals about correspondence

3. Happy Clients! Greater returns for the property.

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For More Information:For More Information:Lease Administration Simplified - A Real Estate Manager’s Guide to Fair and Effective Lease Administration

While the lease may appear to be an intimidating document to people who have not studied it, it is a document that is relatively easy to understand. This key report will help do just that,

by covering lease administration basics

Alan A. Alexander and Richard F. Muhlebach, CPM®, SCSM, CRE, RPA

IREM, 2009ISBN: 978-1-57203-139-5

Available at the IREM Online Bookstore at:http://www.irem.org/acb/stores/1/_font_color_FF0000_NEW_f_P17805C1.cfm

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Questions Questions

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Thanks To:Thanks To:

Chris Hembree, Esq.Phone: 202/415-8563cwhembree13@aol.com

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For allowing IREM to use this PowerPoint presentation