Lease Administration: the role you earn at scale that accelerates profitability
How to immediately save six figures of costs with a single hire
The tl;dr
As you build out your retail fleet, you’re inevitably going to be cutting corners and making mistakes
But those shortcuts and mistakes are small, but add up over time
Once you approach ~20-40 leases, it will be cheaper to hire someone to fix and prevent them going forward, than it will be to keep eating the costs of those repercussions
The Lease Admin function is earned at scale, and can save you hundreds of thousands of dollars in the first year
Want to learn one of the most effective methods of saving on rent? Check out Claire Farr’s upcoming course (and no, you don’t need to be, or even have, a Lease Admin function — although you may want one after this!) and use the below promo code for $50 off!
The muscle you need when you achieve the first sign of scale
As brands embark on their journeys in retail expansion it’s important to look ahead to a capability you will need once you’ve made it through your first phase of scale: Lease Administration.
This isn't just another role; it’s a pivotal element in your expansion and compliance strategy. Let’s dive in.
The role of Lease Administration
Lease Administration experts manage everything from critical lease dates to rent payment reconciliations. They're the guardians of your lease terms, ensuring you're not overpaying and that every clause in your lease is being adhered to. They also help you figure out where you can take advantage of gray areas. Think of these professionals (at least the good ones) as that perfect balance of an attorney who doesn’t “overlawyer” points, but rather knows how to structure, interpret, and follow rules — and when you don’t need to follow them.
These roles can run you $100,000 to $180,000 depending the type of talent and level you’re looking for, and typically report to the Head of Real Estate, or in much larger organizations into Legal.
Measuring their impact
Lease Administrators are your financial and operational safeguard. They're instrumental in avoiding costly mistakes.
For instance, consider a scenario where a lease administrator identifies an overcharge in rent due to an incorrectly applied escalation clause. If your annual rent is $200,000 and the escalation was mistakenly set at 5% instead of the agreed 3%, that’s a $4,000 savings right there. Over multiple properties and years, these savings significantly add up.
This might sound obvious, but not when you consider that (a) landlord’s billing teams don’t always go out of their way to cap your annual escalation as negotiated in the lease, when the rest of their tenants didn’t negotiate it and are at 5%; and (b) your accounts payables team is likely just paying the invoices as received, as they do with all other invoices.
At scale, these small charges add up when they go unnoticed over time.
Another example of big cost savings opportunities is within co-tenancy checks. Larger landlords (eg Simon, Westfield, Macerich, Brookfield, etc.) will generally agree to an operating co-tenancy provision. This usually requires that the landlord have some percentage of their available square footage leased such that their is not egregious vacancy. If that square footage is not achieved, then you get a discount on your rent. But you need to measure that and fight for it. The cost savings can be big:
Normal gross rent = $200,000 annual rent → Alternate Rent = 5% of sales x $2,000,000 sales = $100,000. That’s $100,000 savings!
When to bring them in
Timing is crucial. Ideally, you want a Lease Administrator on board before finalizing your first lease, but that can also be a tough cost to absorb or justify with your finance team that early on.
The real tipping point is when the cost of unmanaged lease issues, like unchecked rent escalations, starts to eclipse the cost of hiring a professional. In my experience, this usually happens when you're juggling between 20 and 40 leases. At this point, a Lease Administrator typically pays for themselves within the first year by fighting for rent credits on overpaid historical rents and driving co-tenancy checks.
What else can they do?
I’ve harped on the rent escalations and co-tenancy checks enough, but this role does far more than that. Here’s a closer look at their key responsibilities:
Rent Payment Reconciliations: They meticulously match lease terms against actual payments. For example, ensuring CAM (Common Area Maintenance) charges align with what’s stipulated in your lease.
Co-Tenancy Checks: Imagine a major anchor tenant leaves the mall, triggering a co-tenancy clause that reduces your rent by 25%. Your Lease Administrator is the one who flags this and ensures you capitalize on it.
Critical Dates Management: They’re like your personal alarm for lease dates. Missing a renewal option by a week could mean losing favorable terms negotiated years ago or — more importantly — losing the lease entirely if the landlord chooses not to renew you. A lot of dates in the lease are tied together and, unfortunately in many cases, those dates are not known at the time of the lease signing…which makes this series of dates challenging to keep track of, but important because they ultimately ladder up to the expiration dates and renewal notice deadlines.
Commencement Date: Typically the date the lease is signed
Possession Date / Delivery Date: Typically an outside date, but can be sooner or later than estimated
Rent Commencement Period: Usually X days after Delivery, but no later than your store’s opening date; dependent on the Possession Date / Delivery Date AND the Store Opening Date
Lease Expiration: Usually NOT as simple as the duration of the term, which is described as X years, but has some adjustments to push the exact date to the end or beginning of a month; dependent on all the above
Renewal Notice Deadline: Usually X days before the Lease Expiration; dependent on all the above
Lease Query Management: They're your go-to for any lease-related questions, providing clarity and guidance on complex terms. For example, if a pipe bursts and costs you $10,000 to repair, your lease will stipulate who’s responsible for that bill.
Document Organization: They keep your lease documents meticulously organized, ensuring easy access and compliance. Over the course of a store’s life, you’ll have a handful of documents to keep track of, and signatures to gather from the landlord, your own company, and potentially lenders and parent companies:
LOIs: lots of redlines result in multiple versions floating around
Lease: similar to LOI, there will be multiple versions of this which will ultimately require several signatures to coordinate
Amendments: whether you’re mutually changing a provision or renewing a lease, these are can be structured as amendments, which may refer to multiple other documents (like the lease and other amendments and exhibits)
Estoppels: you’ll likely have to sign at least one estoppel over the course of your store’s life. It’s usually a statement signed by a tenant that a commercial lease agreement exists, that specific facts of the agreement are valid, that no defaults exist and that they agree to pay rent on a particular date to the landlord. Landlords request these when they essentially need to promise that the statement is true to lender or new property owner.
Partnering with Accounting: They work closely with accounting to ensure rent schedules are accurate and reflective of the lease terms.
Lease Administration platforms
Platforms like Accruent or Occupier are essential tools, but they come with a cost. For a portfolio of 20-40 leases, you’re probably looking at an annual expense of $20k-$30k (last I checked), plus the cost of converting lease documents into Excel data tables for uploads (a few hundred per document if outsourced to another country). These platforms enhance efficiency, but it’s important to factor in these costs when budgeting for lease administration.
So what now?
Lease Administration is an often overlooked part of retail real estate teams and strategies. As you navigate the retail real estate world, remember: a robust Lease Administration function is not just beneficial; it's essential for cost controls and compliance.
Claire Farr, who has saved brands millions of dollars by helping them with their lease admin functions, is offering a 2 hour virtual co-tenancy audit class on January 25, 2024 - 9:30 to 11:30 PT — I can promise you it’ll be worth your time! See link and a $50 promo code below: