June 2020 | Insights From Our Commercial Real Estate Experts – As the world emerges from the coronavirus pandemic and the resulting stay-at-home and non-essential business closure directives, the commercial real estate industry is grappling with how to recover and move forward. Significant impacts on the performance of retail, office and industrial assets have organizational leaders exploring a variety of options – renegotiate terms, defer rent, file bankruptcy, and reject or accept leases in bankruptcy – to get their businesses back on track.
Single Source of Truth
The common theme among all commercial companies right now is the reliance on lease agreements for fact-based decision-making. In addition to understanding the financial terms (and expectations), the often not-so-obvious rights and obligations contained are key in effective recovery planning.
Leases, and the terms they contain, are critical for a wide variety of real estate stakeholders, from the tenants who hold them, to the Landlords who count on them for their core business, to investors and lenders who rely on them to consider options and make decisions.
- Tenants – want to understand their costs, obligations and rights
- Landlords – want to understand cash flow certainty and their ability to enforce lease provisions
- Investors/Lenders – want to understand portfolio risk, cash flow and expected performance
Why Leases are So Important
Leases provide the core foundational structure of both financial expectations and legal rights and obligations upon which stakeholders’ analysis and scenario planning assumptions are made, especially in today’s period of performance stress.
Key information includes:
- Revenue – Base rent, CAM, RE taxes, insurance and utilities, parking, after-hours usage
- Landlord/Tenant rights – Co-tenancy, assignment, defaults, Force Majeure
- Sales Performance – Period performance, overage payments
- Other – COVID-19 related deferrals, NAICS classifications
Despite there being an estimated 3.2 million CRE leases globally, according to RealFoundations’ 2018 Global Lease Count Study, there is no recognized, standardized, uniform lease agreement format. Individual lease contents vary, across companies, geographies, sectors, and many key data attributes are the result of individual negotiations, making consolidation of lease data at scale quite challenging. Additionally, lease clauses that govern unusual events are not always summarized correctly – even one word can make a significant difference (e.g., “and” vs. “or”).
Leases Clauses – The Devil’s in the Detail
While “dates and dollars” are typically clearly articulated in lease contracts, clauses critical to defining tenants’ and landlords’ rights and obligations in a pandemic may not be included, or at best may only be vaguely worded. Furthermore, many of these clauses may not be abstracted to supporting technology systems in the ordinary course of a landlord or management company administering a lease.
RealFoundations recently reviewed a sampling of commercial lease agreements and identified a wide variety of clause language – which offers a significantly variable perspective depending on the stakeholder.
Some clauses to pay attention to include:
- Force Majeure – The varying language we have seen includes the right of tenants to terminate the lease to the explicit statement that rent is still due and payable.
- Co-tenancy – Big boxes continue to leave but defined conditions might be onerous to meet. We have noted 40% space vacancy requirements and long, termination period long 550 days/1.5 years before rent reductions/termination rights are enabled.
- Tenant Insurance – While limited in our observation, certain leases required the tenant to carry business interruption insurance payable to the Landlord as rent.
- Termination / Abatement – The right through either Force Majeure or Laws & Ordinances to defer rent and then terminate the lease after a period.
- Dispute Resolution – The requirement to go through mediation, arbitration, and the waiver of a jury trial.
- Notice Periods – As always, notice periods are also required.
While the above excerpts are pulled from a sample of lengthy and detailed lease documents, they reinforce the need to look deep into the full lease documents to develop fact-based, effective recovery strategies.
How RealFoundations Can Help
To address the fast-moving and rapidly shifting operational environment upon which real estate stakeholders must analyze and make decisions, organizations need a thorough understanding of their rights under each lease. Knowledge of the core clauses that could impact a company’s ability to avoid rent (tenant) or collect rent (landlord) in times of distress is important – but most essential is the ability to access reliable lease data for quick decision-making.
RealFoundations has identified 5 core factors that companies must consider to achieve the optimal value of their lease data in supporting recovery planning efforts:
- Data Fitness – Accurate, timely, complete, consistent and compliant data supports better decision making.
- Flexible Data Elements – The ability for leases to incorporate additional data elements that emerge is critical. (e.g. COVID-19 rent deferral codes, NAICS)
- Rapid Updating Capabilities – As assets shift and performance results emerge regularly, the requirement of on-demand updating to support revised analysis and scenario modeling is vital.
- Automated Data Movement – Minimizing human interaction improves data quality and reliability.
- Data Modeling Capabilities and Tools – Leases can provide the data, but analytical modeling is required for formulating and executing strategy and monitoring actions.
Where to Start
Leases are a critical source of information upon which a wide variety of stakeholders will rely on to support their pandemic-driven recovery planning and execution. Ensuring that accurate lease data is in the right place at the right time enables organizations to make informed decisions about their business. Some of the most prominent investors and investment managers of real estate trust RealFoundations’ Data Management solutions and Data Movement to support informed decision-making.
Connect with Us
To learn more about how RealFoundations can help you run real estate better, contact us by email or +1 214 292 7000.
About the Author
Ed Lubieniecki is an Enterprise Managing Consultant with RealFoundations. Ed has over 25 years of experience in real estate management consulting, serving corporate and institutional clients globally, and delivering an extensive variety of services with a focus on projects of significant complexity. For domestic and international clients, Ed has been responsible for the planning and execution of technology strategies and systems implementations. His experience includes strategic business planning, organizational assessments and design, business process improvements, expense reviews, outsourcing, benchmarking and merger integration assignments. A representative sample of his client list includes Walmart, Ivanhoe Cambridge, QIC, The Walt Disney Company, Iron Mountain and the Stockbridge Capital Group.
About RealFoundations
RealFoundations (RF) is the world’s foremost professional services firm focused solely on the real estate industry. Through our delivery of Management Consulting and Managed Services, we help companies that develop, own, operate, service or invest in real estate make better, more profitable decisions. We are proud partners to over 500 real estate companies around the globe, providing accelerated solutions that solve some of real estate’s most complex challenges. We Make Real Estate Run Better.
