The current trends in the hiring market show the difficulty of finding accounting talent due to decline enrollments and other factors (Declining Enrollments, Fortune Accounting Shortage, WSJ Shortages). In addition, accountants often form the basis for lease abstraction and billing in real estate firms.
Lease abstraction is one of the most critical functions in a commercial real estate back office. From accurate billing to proper summary of lease clauses to save time going back to the lease. The larger your portfolio the more important this function becomes for the organization at large. There is a saying in outsourcing “If it is core to what you do, then do not outsource.” For commercial real estate firms, lease abstraction is clearly a core function. However, there are times when outsourcing lease abstraction can make sense for real estate companies.
What is Lease Abstraction?
First, let’s define what lease abstraction “should” mean. Lease abstraction is not simply a PDF or other document summarizing the lease. Proper lease abstraction summarizes the entire tenancy including amendments and ancillary documents. It includes not only “dates and dollars” but also extracting data points critical for options, rights and restrictions as well as the set up and interpretation of the expense recovery clauses. Critically, this process culminates in data being entered into theERPR system or other integrated lease administration system of record to be accessible in reporting on a portfolio. When performed correctly - this occurs just once at the inception of the lease or other document and is valid for the entirety of the lease term. Often times, company employees rush this process and may just see this as billing but it is so much more than that when done correctly.
Value Proposition for Outsourcing
An organization cannot afford to look at lease abstraction as a commodity. All the abstracted data is foundational to every decision a company makes going forward from daily operations to recovery billings to asset management which results in maximizing sales price. Training can take years to become an expert in lease abstraction. These firms provide quality work enabling your team to focus on responding to tenants, evaluating risks and monitoring the portfolio. In addition, in a tight accounting labor market, they provide a stable resource that allows you to make the right decisions vs. over paying or being threatened by departures.
Here are some considerations that make outsourcing lease abstraction may make sense.
Efficient use of time: Supplementing your existing processes with outsourced functions can enable your firm to focus on the higher value add items in portfolio management such as interpreting difficult recovery clauses or monitoring options. Even if you choose to abstract the information yourself, portfolios at scale can perform representative audit samples to ensure their data is accurate. You should target 99% accuracy on dates and dollars and over 98% accuracy on clauses.
Accurate Clause Reporting: When your real estate portfolio includes complicated options and restrictions, having a quality lease abstract is critically important. From the existence of ROFOs, ROFRs and termination rights to retailers sales thresholds for kick out rights. Without this, your firm risks flying blind when times get rough. Be honest - did your firm abstract Force Majeure clauses before the pandemic?
Smaller Real Estate Portfolios: Any portfolio less than 800 commercial leases should give strong consideration to outsourcing the abstraction function. Why so large?! Well, an average person can handle around 400 leases annually. So if your portfolio has 800 leases, that’s just two people for that function. That’s a significant concentration of risk for knowledge that could walk out the door.
Multiple Property Management Firms: If you are an investor that outsources to multiple property management firms, this means you likely have multiple interpretations of an abstract. By having an outsourced firm perform this function, this ensures that you are able to report consistently on your portfolio with the way you want to see it.
Due Diligence & Acquisitions: Proper underwriting necessitates having an accurate abstract of key lease terms for the target asset or portfolio. Furthermore, this can uncover recovery opportunities that the prior firm missed increasing potential returns.
Finally, perhaps you believe that lease abstraction “cannot be that hard.” If you believe this, then respectfully, you probably have never billed a lease. Translating a lawyer’s words into dollars and setting it up in an ERP to calculate recoveries is not always easy. This is particularly true when the lease has been acquired.
Costs of Outsourced Abstraction
The cost for outsourcing lease abstraction for on shore abstraction can be $400-500 per lease. Quality off shore firms may charge $150 per lease (less with higher volumes). Do not discount these off-shore firms as they often have a hybrid on and off shore model and can deliver high quality abstractions in a timely fashion particularly for acquisition timelines.
Conclusion
There is a saying amongst lease abstraction firms “There is always money” and it almost always comes from the interpretation of lease recovery clauses. CFO’s should not look at this as if they have done something wrong under their control. Rather, they should look at it as an opportunity to get better and squeeze value out of the portfolio.
Finally, outsourcing is not as simple as hiring a firm. It requires the appropriate process integration that is unique to each organization. A properly balanced mix of outsourcing and insourcing could help provide the insights you need to manage the portfolio risks and allow you time to find and train the right talent.
Contact Thurston Advisory & Consulting - jim@thurstonadvisory.com
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