When real estate experts are asked which is the most critical function they perform, lease administration has historically ranked low on the scale compared to managing transactions, design and construction, and facilities management. These functions address delivery of space to meet business needs as opposed to administration. However, in the wake of corporate scandals, increased regulations - most notably the Sarbanes-Oxley Act of 2002 - have created an elevated focus on the accuracy of financial statements and the strength of control systems. With real estate costs firmly placed among the top-five expenses for most organizations, lease administration is now perceived as a critical function, responsible for accurately managing and reporting often significant real estate obligations.
In large organizations, lease administrators are responsible for ensuring the accurate administration of millions of dollars each month. Thousands of transactions - including rent, real estate taxes, property insurance, common area charges, tenant improvement allowance reconciliation and recovery, and sublease payments - must be processed accurately. If the information in a lease administrator's database is inaccurate, the risks are substantial.
• Unintended lease renewals: Missed notification dates could result in unintended lease renewals; in some areas of the world such as the United Kingdom and other parts of Europe, 25-year leases are commonplace, so unintended lease renewals have the potential to create obligations worth millions.
• Payment delays: Inaccurate or delayed payments and notifications can result in penalties and incremental premiums to accommodate damages.
• Compliance challenges: Inaccurate reporting and insufficient controls could result in errors within financial statements significant enough to trigger penalties under Section 404 of Sarbanes-Oxley.
Some risks can be easily mitigated. Technology that is specific to lease administration is now available to ensure accurate, integrated, and automated data. Notices can be automated and information can be validated and shared companywide. With new imaging technology, leases can be scanned, imported into databases, shared by many administrators, and automatically verified for correctness. Software systems can notify administrators of key dates for required actions. Nonetheless, policies and processes must be in place to support accurate data input and maintenance, valid reporting, and follow-through on notices received. With these measures in place, companies can administer leases effectively and demonstrate that appropriate controls are in place to ensure the accuracy of financial information provided.
An alternative is to outsource the entire lease administration function. Suppliers invest substantially in technologies and platforms to deliver these services. They provide centralized expertise, leverage their expertise across multiple organizations, and take advantage of labor arbitrage offshore. They offer competitive prices and enable organizations to pay for only the level of service required as their portfolio sizes and needs change. By contrast, in-house delivery models can be more difficult to scale.
Whether an organization chooses to outsource or handle lease administration internally, the risk remains with the organization. The first and most important step is to recognize the level of risk and develop an effective plan to address it.
Scott Tibbo is managing director of Expense Management Solutions, Inc., a strategic advisory firm that specializes in helping clients deliver corporate real estate functions effectively. Mr. Tibbo can be reached at (508) 460-7014; visit the company's website at www.expensemanagement.com.