Control Costs and Mitigate Risks with a Commercial Lease Process Review
Leasing a property can be a complex process involving negotiations, legal agreements, and ongoing management.
A lease process review is a comprehensive analysis of the lease life cycle and typically includes an examination of the lease agreement, negotiations, administration, accounting, and compliance and can be performed from the lessee or lessor perspective.
The goal is to identify and improve any weaknesses or inefficiencies in the lease process, helping you reduce costs, increase efficiency, and minimize risk.
Key Areas of Review
The lease process may include the following areas:
Lease Agreement
The lease agreement is examined to ensure that it is legally binding and contains all the necessary clauses and provisions. This may include reviewing:
- Lease term
- Rent schedule
- Security deposit
- Renewal and extension options
- Insurance requirements
- Tenant improvement stipulations
- Common area maintenance calculations
Identifying language open to interpretation and addressing it ahead of time can reduce risk of future conflict between parties.
Lease Negotiations
Negotiations are another important review area as they can impact the outcome of the lease process. A process review will include interviews with key stakeholders involved in the negotiation process and highlight areas where certain contributors should weigh in and identify any gaps in the review prior to lease execution.
Lease Administration
Lease administration is also a critical area of review, as it involves ongoing management of the lease.
The review will examine the process for administering the lease, including how and if rent payments are collected, maintenance and repairs are handled, that the proper deposits and insurance are on file, and that disputes are resolved.
Checking to confirm the lease administrator is executing the responsibilities outlined in the lease is critical to maximizing income by collecting what is due, identifying training needs, and minimizing costs through preventative maintenance and strategy.
Lease Accounting
Lease accounting involves the financial aspects of the lease process. The review will examine the lease accounting process, including how rent payments are recorded, how expenses are allocated, verification that calculations have been performed correctly, and how financial reporting is prepared.
Compliance
The review will examine if the lessee or lessor is compliant with all applicable lease requirements such as percentage rent reporting or tenant improvement disbursement requirements as well as identify areas for improvements within your current processes and controls.
Methodology
The lease process review typically involves multiple steps including:
- Planning. Define the scope of review and develop a plan for conducting the review. This includes identifying key stakeholders and determining specific areas of the lease process to examine.
- Data collection. Collect and review lease agreements, correspondence, financial statements, and other relevant documents. Conduct interviews with key stakeholders if necessary.
- Analysis. Analyze all data collected and identify where improvements can be made in the lease cycle.
- Recommendations. Develop recommendations for improving the lease process customized to the specific needs of your organization.
- Implementation. Implement recommendations and monitor their effectiveness. This may involve making changes to the lease process, training staff, correcting miscalculations, or implementing new systems or tools.
Benefits of Performing a Lease Process Review
A lease process review is a valuable tool to help you enhance your real estate strategy and execution.
- Increased cost savings. A lease process review can help identify areas where costs can be reduced, such as by renegotiating lease terms or improving lease administration processes. For example, can a lessee negotiate a security deposit burndown schedule? Or can a lessor improve its operating expense definitions to create more allowable costs? A more efficient lease process can provide clarity for all stakeholders and help you reduce the time and resources required to manage your properties.
- Informed decision-making. A lease process review helps identify where you should focus your time and resources to make the biggest impact in achieving your real estate goals. This may include uncovering a need to assess and improve the current state of your financial systems or a need to audit and make changes to an upcoming lease renewal.
- Minimize risk and continue improvement. A lease process review can also help minimize risk by identifying potential legal or financial issues such as unclear or conflicting lease language, weaknesses in the accounting process such as inadequate record-keeping or poor financial controls, or non-compliance with applicable laws and regulations. By addressing these issues, you can reduce the risk of financial loss, reputational damage and disputes or legal action down the line.
We’re Here to Help
For more information about lease process reviews, contact your Moss Adams professional.