As the New Year draws near, most professionals responsible for commercial lease management are laser-focused on the next year’s goals. Before going too far down that path, it’s well worth your time to take stock of lingering issues from the current year, as well as create a plan for managing critical lease-related items throughout the next 12 months.
Based on decades of experience, Property Works has assembled the following “Best Practices for Commercial Lease Planning for the New Year.”
If you’re not tracking your assets, you’re losing money. Start your New Year’s preparation by taking stock of what you own. As you know, tracking capital assets is an annual requirement. However, most busy people don’t think about doing this until the last minute. Also be sure to update the depreciation schedules for anything not permanently attached to the building structure, which includes everything from stoves to computers. These will be important write-offs when tax season rolls around.
While you’re at it, take a hard look at the age of the equipment and how many times it has been repaired. When you discover assets that are in use beyond the recommend lifespan, be sure the replacement costs are built into the new budget.
If you’re scrambling now to take the year-end inventory, consider putting real-time asset tracking protocols in place to avoid the panic next year.
Tenant Improvement Allowances
Year-end is a great time to circle back to ensure that all the tenant improvement (TI) allowances owed to you have been paid out. To do this, take a close look at the lease language to determine what obligations must be met to collect TI funds. The most common requirement is completion of capital improvements specifically outlined in the lease.
Even after you’ve exhausted all TI funds allotted in the lease, sometimes obtaining additional funding is as easy as requesting them from your landlord. This is especially common for remodel projects. You may even have great negotiation power if the landlord feels this is key to maintaining your company as a long-term tenant.
If you haven’t received all back-up documentation for CAM expenses, now is the time to make that request. Carefully compare every pass-through expense against the exact lease language to ensure you were appropriately billed.
Reconciling CAM expenses can be a tedious process, so many businesses find it easier to just pay the bill rather than invest time in a thorough inspection. However, it’s beneficial to conduct at least one in-depth comparison to use as a base year. Most businesses can expect a 3 to 5 percent increase in CAM expenses year-over-year, so you may choose to forgo the analysis if the total falls within an acceptable price range. However, if you receive a final bill that’s proportionally higher than the base year and anticipated increase, you’ll know to closely examine all charges.
Since not all CAM statements arrive at the end of the year, look at your lease so you’ll know when to expect them. By marking your calendar and allotting time to carefully review statements throughout the year, you’ll avoid the year-end backlog of paperwork.
Most percentage rent reconciliations are due at the end of the year, but it’s important to check your lease language to be sure. There are typically specific time periods (usually 60 days) stated in the lease to prepare and submit the calculations. If percentage rent is new to you, there are certain concepts that you should be aware of, including accumulated, prorated, breakpoints and exclusions.
As a best practice, it’s important to check your calculations throughout the year so you won’t overpay and lose money, or underpay and owe additional money at the end of the year.
Straight-Line Rent Report
If your company uses an accrual-based accounting system, you’ll need to complete a straight-line rent report. If you’re currently doing this in an Excel spreadsheet, you should be aware that the chances for errors are high, especially when multiple people are working on the same document. However, database programs, such as the one developed by Property Works, allow far greater control and the ability to lock down the information.
Don’t even think about entering the New Year without a complete list of important lease dates at hand. Review your lease carefully and know what lease options and expirations you’ll face during the next 12 to 18 months.
If your lease is coming up for renewal, it’s not too early to think about whether you’ll stay, leave or renegotiate. Also, know your termination rights if sales are not up to par, as well as whether co-tenancy requirements are in place. Also, check the dates of security deposit refunds. Most security deposits are returned at the end of the lease, however, about 20 percent of leases allow tenants to receive it back after a 5-year period if all other conditions have been met.
There are items on this list that most people can begin right away, if you haven’t done so already. However, some of them may take a few months to complete. The main goal is to get a handle on what you need to do now (or immediately after the holidays) so you can kick off the New Year with a better handle on your expenses and staffing needs, as well as a renewed sense of control.