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In commercial real estate, the lease is everything. The lease is the contract that guarantees the income to the property; it is the document that, for all intents and purposes, gives a property its value. In other words: you can take it to the bank.
Lease administration is the process of making sure the terms of the lease are followed. This can include anything from the payment of rent and common area maintenance charges to repairing obligations and serving of notices. Lease administration is one of the key components of proper property management. Knowing the important terms, timing, clauses, and stipulations, means that a property manager understands the commitments between the parties.
A lease where the lessor is responsible for paying all property expenses, such as common area maintenance (CAM), taxes, and insurance.
A lease where the tenant pays base rent at the start of the lease but takes on a proportional share of some of the other costs of the property, such as utilities, maintenance, property taxes, insurance, etc.
This lease requires the tenant to pay a portion (usually prorated based on a formula) of the operating expenses (CAM), property taxes, and property insurance spent on the property.
A lease is a legal document and it can be overwhelming to read through all of the legalese. But these terms and clauses are essential to both understand and properly interpret. Different leases will have different clauses but this is a selection of common ones to be aware of:
| Rental amount and payment terms | What amount is due to the lessor from the lessee and how often will it be paid. Not all leases are monthly. In some instances, they could be annually or quarterly. In certain areas, specifically when there is a season (e.g. beach town or ski resort), the tenant may only be required to pay rent when open. |
| Rent steps or increases | The lessee may have an increased amount from the initial lease term. That increase could be negotiated to be a set amount on a regular basis (annually) or it may be increased by inflation (CPI). In some instances, the lessor may want an amount that is indexed to inflation but there is a minimum amount (e.g. “CPI or 3%, whichever is greater”). |
| Payment method and allocation | The lessor may require that the lessee pay by ACH or by check. In some instances, if the lessee has had checks returned for lack of funds, the lessor may insist that payment is by cashier’s check or money order. The lease may also state specifically how the payment amount is allocated against the tenant charges (e.g. delinquent rent, then late fees, then current rent, then CAM and expense recoveries). |
| Lease duration including start and end date | Dates are an important part of a lease. The lease duration may be stated in months or years. Important dates include the date the lease was executed, when the rent commences, when the tenant occupies the space and when the lease expires. |
| Security deposit | The lessor may require the lessee to secure the premises with an amount that will be held by the lessor for a designated period. The security deposit may be in the form of cash (check), bond or letter of credit. |
| Lessor and Lessee | All parties to the lease need to be named. The lessor as landlord, the lessee is the tenant. Other names that may be on the lease include the tenant’s trade name (“DBA”) and the property manager or other agent of the lessor. If the lessee is a corporate entity the name of the authorized corporate agent and a guarantor may also be named. |
There are several more clauses that matter and we have covered them in another guide - 17 Must Know Lease Clauses In Commercial Property
Once you’re well acquainted with the various nuances of commercial leases, the real work starts as you begin managing everything set out in there. Your key tasks will include:
The most basic tool used by landlords and property managers early on is spreadsheets. It's close to free to manage and doesn't require much training. However very quickly most professionals begin to realise why this approach isn't not scalable.
As mentioned here, there are numerous activities involved in proper lease management and this creates a significant amount of moving parts to coordinate and stay on top of. This is where more advanced technology becomes increasingly important. Automated, intelligent property management software, can simplify how you monitor and renew leases and manage other critical dates from a single dashboard.
Whether it’s leases and their important terms and conditions (such as start and end dates, rent increases, insurance information, expense recoveries), property information or maintenance requests, today's technology can give users a 360-degree view of their portfolio.
By driving workforce efficiency, technology can help commercial real estate organizations save time and eliminate data redundancy, input errors and costly missed critical dates. This is also a significant time saver as it takes away the need to find and surface key dates and it helps eliminate the risks of missing those dates.
Automation is another big advantage with a property management system which frees up your time and removes the risk of human error.
Here are some common workflows which can be automated using software
The lease is about more than start and end dates
Understanding and then managing every key lease detail is no small feat but it’s also critical to effectively managing commercial properties and increasing NOI and property value. While the blueprint for proper lease administration has largely remained the same over the years, the advent of tools and software to support and automate these processes has helped streamline how managers work and serve their tenants. After all, your tenants are your customers and setting the foundation for a great relationship through how you manage the lease is worth doing right.
