CORPORATE RESEARCH

Lease abstraction:Mitigating portfolio risk

IntroductionThere are many options available to a Corporate Real Estate (CRE) team to mitigate portfolio risk. Having a robust lease administration program is fast becoming a popular choice to not only mitigate portfolio risk, but also financial risk, and at the same time, deliver cost savings and facilitate corporate compliance requirements – all of which are high on the agenda in this post-GFC world we live in. Lease abstraction is a key pillar of any lease administration strategy.The objective of this white paper is to assist companies determine whether lease abstraction is the right choice to improve portfolio performance. We outline the concept of lease abstraction and what the process should look like, showcasing best practise implementation. We also consider

some of the challenges which could include a decentralised property organisational structure, a lack of accountability around data integrity or the absence of a lease management system. It is not uncommon for organisations to lack defined policies or procedures around lease management. However, taking a strategic approach to lease abstraction will ensure real estate assets are fully utilised, companies do not unknowingly pay inappropriate charges or inaccurate rents, critical dates are not missed, nor are opportunities to protect options and rights. Companies that do proceed down the abstraction path can be confident they will be well positioned to make strategic real estate decisions to support and enhance their core business.

Lease abstraction definedIn simple terms real estate document abstracting is the process of extracting data points critical to the management of a real estate portfolio and compiling that data into a report and uploading that data into a database to which will enable your organisation to make better-informed real estate decisions. A lease abstract report provides details of the key business, financial and legal information contained in a real estate lease and related documents such as owned property documents, deed of sale or valuation reports. Typically a lease abstract report contain details about the property location and basic lease details, cost schedules, key events, terms and conditions, car parking arrangements, landlord and tenant obligations.Traditionally, lease abstraction has been performed by non-real estate administrative resources as companies did not place importance on the process nor realise the technical nature of lease abstraction. It has only been in the last 5-10 years that companies in Asia Pacific have really seen the importance of using specialised teams trained specifically in lease abstraction. As the globe shrinks and many organisations operate across boundaries, these specialist teams should be multi lingual, operate across multiple currencies and be expert in the typical lease terms of multiple geographies. This will ensure a more accurate and cost efficient lease abstraction process. Another approach has been lease abstraction undertaken by the broker conducting a transaction. Some organisations have been attracted to the potential lower-fee, and the knowledge the broker has of the intricacies of the lease, as well as in-depth market knowledge. However, this creates an inconsistent approach as the lease abstraction process is only ever undertaken when a transaction is negotiated. In addition, if organisations use multiple brokers, there is an inconsistent approach in terms of methodologies and systems meaning there is a lack of standardised data across the portfolio. As a result of this ad-hoc approach and lack of cross-checking of information, the costs and risks could be a lot higher than implementing a robust lease abstraction process.

A key trend which has emerged and is now developing is the automation of the abstraction process. A number of specialised single service providers are investing heavily in this technology, while the larger integrated service providers with lower cost models are waiting for the technology to become more evolved. This new wave in technology is characterised by OCR scanning and web based data change and management workflow tools which allow highly effective cross checking techniques, and error tracking and productivity statistics and automated work flows1. To summarise this section the key ingredients to a successful lease abstraction process are: • A committed team of People with the right skill base and

mandate and to build an effective lease administration model

• Consideration of whether the lease administration delivery model will be centralised or decentralised so that the development and implementation of standard procedures and metrics are consistently applied across the abstraction procedures

• A clear view of the lease administration delivery model and whether an organisation plans to self-perform or outsource

• An understanding of how the organisation plans to enable technology to maximise the investment in abstracting lease data moving forward

• A set of processes and tools to ensure that repeatable outcomes can be deliverable no matter the size, scale or the geography

• A clear understanding of the extent of data that needs to be abstracted and a clearly defined set of data points

• A partner who can demonstrate a track record of best practise in the art of abstraction

• A project manager to effectively manage the communication and document collection requirement

1 Refer to Jones Lang LaSalle’s paper “Outcomes Enabled by Technology”

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The challenges of abstraction

A common story when embarking on an abstraction process is a lack of visibility by occupiers into the state of their lease documentation. It is not uncommon for organisations to not have lease documents for certain properties. Typically in Australia for example airport corporations, and owners of telecommunication and CCTV infrastructure don’t provide adequate documentation. The other challenge is that lease documentation does not just comprise of the lease, it also comprises of the related correspondence that pertains to the lease such as renewal notices correspondence from the landlord, rent roll files and variation reports. While other challenges include:

1. Incomplete or missing documentation for each property preventing the full abstraction of critical date required to manage any associated risks

2. Lack of and documentation control and clarity around each query raised in terms of who is responsibility for finding the required information

3. Lack of consistency of polices and processes to ensure the accurate and abstraction of data from leases

4. Abstraction occurring across multiple locations and by multiple teams impacting on data accuracy resulting in inconsistent results in terms of data accuracy

5. Having an understanding how the data will be managed over the long-term to protect data integrity

6. Lack of dedicated risk management process (such as overcoming lack of quality documentation) which results in delays and extended timeframes Lack of resources trained in lease abstracting, who understand local market practices

7. Poor quality documentation such as scans with pages missing

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What should a lease abstraction project and process look like?

There are a number of triggers for an organisation to embark on a lease abstraction process. These could include M&A activity to ensure that the organisation understands the liability of portfolio quickly and accurately, failure to act on a critical data because the lease data is not available or the lease not being interpreted correctly which has resulted in a big cost impact to the organisation or when a company has opted to outsource the lease administration function to a service provider. So with the mandate to commence an abstraction project process, it is important to have viability of the critical ingredients required for the implementation of a successful abstraction process. These include :

1. A key outcome of the process identified such as a portfolio opportunity assessment or a clearly articulated strategy around the ongoing management of lease data

2. A team of real estate lease abstract specialists with demonstrated experience interpreting leases across all the countries your organisation occupies property in

3. A team that operate with policies and procedures that comply to organisational and global standards such as SOC1

4. An escalation procedure defined and risk assessment performed

5. Strong and demonstrated project management experience in data collection and abstraction projects

6. A nominated representative within the organisation for the abstract team to request and follow up on additional information

7. Abstraction business work processes which are documented and currently in practise and can be evidenced

8. Clearly defined lease terms and abstraction scope which established at the commencement of the project

9. Electronic copies of all hard copy lease documentation Technology such as box.com, FPT sites to effectively and efficiently catalogue and transfer documents

10. A documentation register that clearly tracks the progress of each document against each property through the abstraction process

11. A clear view of whether this is a one off project or part of an outsourced arrangement upon commencement

12. Abstraction processes needs to have a key outcome such as a portfolio opportunity assessment or a clearly defined strategy of the ongoing management of lease data

13. The abstraction process needs to be supported by accurate calculation tools to apply fixed and CPI rent increases

14. The timeframe for abstraction varies based on the size of the portfolio, the number of leases, the number of defined lease terms and size of abstraction scope, as well as the extent of missing documentation and available data. Typically a portfolio of 200 plus leases is delivered in two to three month timeframe, whilst for a smaller property portfolio the timeframe is between one to two months

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Migration verses abstraction

Often when considering abstraction the question of migration will arise, especially in the event that an occupier has existing lease data which is held in a property management or finance system. The migration of data is the process of transferring data from one system to another where it does not comprise of validating the quality of the data in that system to the source lease documentation. There are a number of challenges to successfully migrating lease data and in our experience migrations result in data inaccuracies of between 40-60%. Thus if an organisation does opt to go down the path of data migration, they must accept that inaccuracies will be a reality and allow for for a contingency in the project budgets. Some of the most common issues that arise during a data migration are:

1. When data is migrated from one system to another, characters and letters may automatically convert into an undecipherable text

2. After data migration, it is often found that the mapped data does not match the abstraction and data management scope. This is mostly the case where data is migrated from an incumbent service provider or a legacy system which has delivered lease administration services on a different scope and or a lack of consistent processes

3. If the data provided did not have a defined scope then the data across the portfolio records are likely to be inconsistently abstracted

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As a result, the recommended approach is to allow for an additional audit post migration to identify the gaps in the data that have occurred due to difference in or lack of defined scope. This exercise can often result in having to abstract data form source documentation often resulting in the process costing just as must as full abstraction.So if data migration vs abstraction is the chosen path, the organisation needs to consider how you are going to validate the data that gets migrated across. In some cases the process of migration and validation can cost clients just as much as abstraction. If you are considering the migration of your existing data instead of abstraction the following questions need to be considered:

1. How is the organisational data currently stored – in an existing proprietary system? Or in a service provider’s system?

2. Has the data been abstracted via consistent policies and procedures?

3. Do you have a list of data fields that lease data populates?

4. Has all the information to manage lease data effectively been captured?

5. When was the last time the data was audited? And is it valid and up to date?

6. If the data is not validated or up to date are you either a) prepared to embark on an abstraction project post migration or b) accept invalidated data moving forward or c) pay additional ongoing costs for the long term validation of data

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The benefits of abstraction:Abstraction has a fundamental role to play and has become a critical foundation for 1) cost saving initiatives, 2) risk mitigation and 3) strategic portfolio optimisation data integrity is a vital requirement. Why does abstraction mitigate risk?Abstraction ensures an organisation does the necessary due diligence to maintain complete leasing files and minimises the legal, financial and the day to day operational risk. All too often companies initiate an abstraction project due to a critical date being missed resulting in significant unplanned costs or worse, having to vacant a premise at short notice.

Having accurate lease data that generates effective critical date diaries is a product of abstraction and ensures that all the relevant data preventing the unnecessary additional costs is captured.

Why does abstraction save costs?Lease documentation has a direct impact on the cost of operating a business. The costs associated with leases and supporting documents are rent, renewal rent, security deposits, late fees and interest, taxes and GST, maintenance costs, percentage rents for retail and critical components that affect the transaction. It is this data, that if abstracted correctly and consistently will save costs for an organisation.

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Abstraction will provide an organisation with the detailed cost information required and consolidate it into a central data repository. A robust technology platform will analyse, organise the data into reports and identify variances. This will ensure that landlord reconciliations can be accurately and effectively performed – that outgoings and rates are allocated in a correct and consistent manner, the correct rental amount is being charged by the landlord and that insurances and taxes are managed and procured. Abstraction will provide an organisation with the cost data required to budget and forecast property expenses and ensure the appropriate funding is available.

How will abstraction enable strategic portfolio optimisation? The investment in abstraction will ensure an organisation acquires all of the information required to manage a portfolio. Transparent and robust data will provide a greater CRE mandate as knowledge is power. This will ensure a CRE team can effectively access the information to strategically manage your portfolio, to lead the discussion and decision making process about the organisations portfolio in terms of acquisitions and divestments. It will open opportunities to explore and extend strategy into work place and how efficiencies can be gained from workplace design and effective utilisation of real estate.

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Jones Lang LaSalle delivers measurable improvements in the productivity of our clients’ assets, workplace and people. Our Corporate Solutions specialists leverage extensive real estate experience and industry knowledge to drive value across the entire real estate life cycle. They are able to deliver seamlessly across a single project or multiple geographies.Our integrated platform not only promotes greater operational efficiency and reduces delivery risk, but creates additional value, allowing for innovation and collaboration on all assignments regardless of size. We eliminate redundant activities, excessive oversight, and gaps that may occur when managing multiple providers. The outcome is greater efficiency, risk management and sustainability for our clients.At Jones Lang LaSalle, we provide scalable Lease Administration services for organisations that own and occupy space locally, regionally and globally. We have over 300 professionals operating across six global ‘centers of excellence’, using a consistent governance platform. We help clients control and leverage portfolio data for more than 80,000 leased and owned properties worldwide.Our specialists provide comprehensive solutions to help you navigate through these challenges, significantly reducing your risk and ensuring you take advantage of every opportunity to maximise portfolio efficiency. We are able to deliver these solutions as stand-alone services or integrated into the work processes for strategic planning, transaction management and financial management. Lease Administration has been a core competency at Jones Lang LaSalle for over a decade. We are the first real estate services firm to invest in a dedicated, global Lease Administration capability—a robust platform that enables us to provide information, expertise and quality services at levels that our competitors are unable to achieve.

We see the role of lease administration as proactively identifying cost savings and avoidance, enabling strategic planning and portfolio optimisation, enhancing organisational effectiveness and speed, as well as supporting corporate compliance requirements. Undertaking a lease abstraction project will ensure an organisation has data accuracy and integrity that will enable these objectives to be achieved. Those companies that think long-term and have robust process in place with dedicated, specialist skills will achieve risk mitigation and drive productivity gains.

Conclusion About Jones Lang LaSalle

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Naomi Nielsen Head of Lease Administration, Australia +61 2 9220 8692 naomi.nielsen@ap.jll.comNaomi Nielsen is the Head of Lease Administration for Jones Lang LaSalle in Australia. Naomi has more than 22 years of real estate experience in the public and private sector, having both worked on the consulting and advisory side as well as having driven the corporate real estate agenda internally at positions held at AMP and the University of New England. Her client base is diverse and includes leading corporate brands such as Credit Suisse, Nortel, Commonwealth Bank, NAB, KPMG, Suncorp and Woodside Energy, as well as tertiary institutions including University of Sydney, RMIT, University of NSW, University of Western Sydney, Murdoch University and University of Canberra.

Author

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COPYRIGHT © JONES LANG LASALLE 2013. All rights reserved. No part of this publication may be published without prior written permission from Jones Lang LaSalle. The information in this publication should be regarded solely as a general guide. Whilst care has been taken in its preparation no representation is made or responsibility accepted for the accuracy of the whole or any part. We stress that forecasting is a problematical exercise which at best should be regarded as an indicative assessment of possibilities rather than absolute certainties. The process of making forward projections involves assumptions regarding numerous variables which are acutely sensitive to changing conditions, variations in any one of which may significantly affect the outcome, and we draw your attention to this factor.

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