Founder and CEO, Visual Lease.
In the current economic environment, businesses are searching for new ways to save cash. However, they often overlook one critical aspect of their business: real estate management. Real estate leasing costs often represent one of their top three expenses, usually coming in right behind payroll. And most view their leasing costs as locked in, with little ability to impact them.
In actuality, proactive lease management is a low-risk, high-yield way to improve the overall financial control of their lease exposure. Done right, it can result in tremendous cost savings. Done wrong, the financial risk from even the smallest error can be catastrophic – running into thousands or even millions of dollars in overpayments, missed reimbursement opportunities and tax errors over the lifespan of the lease. It’s essential that business leaders carefully scrutinize and manage leasing decisions, administration practices and expenses.
Are you losing money due to a lack of lease portfolio control?
Human behavior (and my experience as a leasing attorney and founder of a lease management platform) tells us that people will do what is most expeditious and, in this case, that often involves assuming that rental and other lease-related charges are correct without confirming the details. This is where companies get sidetracked and wind up agreeing to pay for expenses they never should have or not receiving benefits to which they are entitled, all because they didn’t have visibility into the terms of their leases.
Here are a few examples of the most common financial errors I’ve seen as a result of lax lease management practices, and how they can significantly impact the bottom line.
1. Overbilling by lessors: A large healthcare provider noticed that its landlord had improperly included capital improvements in the operating expenses, but missed the deadline to object, resulting in a $50,000 loss.
2. Missed reimbursements: A national bank failed to properly track procedures for requesting reimbursement for tenant improvements from the landlord. The landlord had agreed to reimburse the tenant for what it spent improving the space, provided they submitted paid invoices by a certain date. The tenant spent $500,000 in improvements but neglected to submit the invoices, therefore forfeiting its reimbursement rights.
3. Tax errors: A global engineering firm was regularly billed for its share of real estate taxes for the building it occupied. In the last year of its lease, the taxes had a significant increase, which the landlord billed and the tenant paid. However, unbeknownst to the firm, the landlord appealed the taxes and two years later secured a refund. The tenant ultimately recovered the refund through its lease audit provider, but had to pay a share of the recovery as a fee.
These are just a few of the many financial errors that can be avoided by taking a holistic and proactive approach to lease management.
Set Up Your Lease Portfolio For Success
For successful management of any lease portfolio, there are initial steps that can be taken to maximize efforts to avoid costly mistakes. When managing your leases, it is important to have a lease administration process to track, manage and monitor rental payments, along with handling any changes to leases. A strong process and team can help your company stay organized and better monitor leased assets to avoid financial errors down the line. Additionally, understanding the portfolio life cycle is key to having the best grasp on lease management, which will optimize visibility and control over leases to keep your portfolio in check.
Centralization is how companies can up-level their lease management to uncover more cost savings and catch potential errors before they occur. Centralized lease management helps businesses avoid issues in the following areas:
1. Intra-departmental knowledge transfer: When trying to conserve cash, it is incredibly important that you only pay what you have agreed to. Yet lease management tends to fall to the back burner in favor of focusing on more pressing business initiatives. Once a deal is signed, the responsible team often delegates ongoing management to departments that aren’t aware of the intricate details of the agreement. This leads to dispersed data sets, inconsistent lease decisions and, ultimately, overpayment of lease obligations.
2. Transparency: Organizing and tracking lease transactions is much more complex and time-intensive than most people realize. For example, a lease that is 10 years old may consist of numerous different documents, including amendments and side agreements, that have altered the terms of the original deal. Records of these changes may be found in correspondence, emails and other disparate documents, making it extremely complicated to check the rights and obligations when an issue or dispute arises.
3. Unauthorized precedents: Many leases stipulate that bills are considered correct if not contested within a defined period of time. Failure to actively monitor and check the accuracy of bills against the lease terms may mean permanent acceptance of an incorrect charge. The even greater danger is that accepting incorrect bills sets a precedent for how future bills are issued.
Proper lease management can help marry the benefits and obligations of each lease with the day-to-day financial and operational activities to make sure they stay aligned. This additional due diligence can aid in documenting the terms of every lease, calculating every payment and identifying anomalies or hot spots in need of attention before a problem pops up.