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 facility management. However, as regulatory and shareholder scrutiny intensifies, the importance of lease administration has been elevated because of its potential impact on the accuracy of financial statements and the value at risk in corporate leases.

The lease administration function in large organizations is responsible for accurate administration of obligations and contracts that may reach into the 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 tracked and processed with precision. If the information in the lease administrator’s database is inaccurate, or the processes to monitor and track this information are not consistently or effectively implemented, the risks are substantial and may result in:

• Unintended lease renewals - Missed notification dates may result in unintended lease renewals and obligations worth millions of dollars. These risks are magnified in countries such as the United Kingdom and others in Europe where twenty-five year leases are commonplace.

• Payment delays – Inaccurate or delayed payments and notifications can result in penalties and incremental premiums.

• Compliance challenges – Inaccurate reporting and insufficient controls could result in errors in financial statements significant enough to trigger penalties or restatement of financial reports under Sarbanes-Oxley.

Improved Technology Through Automation and Integration

Because many lease administration tasks are repetitive and data driven, they are prime candidates for automation and integrated technology. Leases can be scanned using imaging technology, imported into databases, shared by many administrators and automatically verified for correctness. Systems can automatically notify administrators of key dates for action on leases and are often integrated with the accounts payable function to increase efficiency and accuracy.

According to Garrett Cannon, senior vice president of real estate and facility management at Johnson Controls, Inc., today, almost every lease administration implementation includes integration with accounts payable.

Dawn McReynolds, global practice leader of lease administration for Cushman & Wakefield, said she sees her clients increasing integration across department lines, stating, “Within the client field, data is shared by the business contacts who are running facilities…accounting, tax department, and anyone involved in asset management.” At Cushman & Wakefield, even the human resources department sometimes has access to all of the data shared by lease administrators.

Increased Emphasis on Accountability

Old-fashioned paper filing and calendaring systems no longer hold up to scrutiny. The current regulatory environment has brought about a need for improved business processes, tighter controls, and more accurate, real-time reporting for corporate real estate obligations and liabilities. As more and more companies outsource this function, it is important to insist on SAS 70 audit verification from service providers.

Marc Betesh, president of auditing firm KBA Lease Services, stresses that the expertise of lease administrators is just as important as the expertise of those negotiating the leases. “To keep leases on track and ensure tenants receive the benefits negotiated into their deals, the tools, resources and processes must be in place to ensure that lease administrators can identify and react to deviations from expected lease performance.”

Increased Levels of Outsourcing

Given the pressures on real estate executives to cut costs, there is an increased emphasis on effective delivery or outsourcing of lease administration services, a focus on desk-top and full scale audits to recover erroneous payments, and expansion of the lease administration function to include tax administration and other related tasks.

James Colaianni, senior vice president of lease administration at Jones Lang LaSalle explains, “We get together on a monthly basis and share what savings we’ve found and how we found them.”

Betesh cites one case in which his firm discovered compounding incorrect charges while auditing a Fortune 500 company. By resolving the problem, the company saved $2.5 million over the twenty-five-year lease term.

As lease administration continues to evolve, technological automation and integration, increased accountability and cost management will remain at the center of improvement efforts. Executives at leading corporate real estate organizations must continuously scan the horizon to identify future trends, spot opportunities, and implement best practices that reduce financial and operational risk, and deliver value to the enterprise.

Earlier this year, EMS Insight interviewed a variety of corporate real estate executives as well as professionals from leading lease administration service providers to understand how new innovations in service delivery can mitigate this risk. The findings were published in a report, “Lease Administration: Current Perspective and Future Trends.” To purchase the report, visit www.emsinsight.com. Robert Teplansky is the Director of EMS Insight, the research and publishing practice of Expense Management Solutions, Inc. He can be reached at teplansky@emsinsight.com.