LEASE ADMINISTRATION COMMERCIAL PROPERTY 1. What to expect from today… An insight into lease...
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Transcript of LEASE ADMINISTRATION COMMERCIAL PROPERTY 1. What to expect from today… An insight into lease...
LEASE ADMINISTRATIONLEASE ADMINISTRATION
COMMERCIAL PROPERTY
1
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/[email protected]
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For allowing IREM to use this PowerPoint presentation