Thursday, February 7, 2013

Lease Abstraction at Six-Sigma Accuracy

Lease Abstraction is the process of reading and interpreting a lease document and then summarizing terms into a form called a lease abstract. These data-points can then be systemized into a central data repository called a property database or alternatively known as a lease administration database.

The database is only as good as the accuracy of the data input. My findings in the past are that most companies' databases have significant errors, and this places them 'at risk' of missing critical dates such as lease renewal options or termination options. The end result can be financial losses or the company's operations being placed in jeopardy. For example, a global technology company with operations in the UK missed a lease break option that ended up costing them in excess of 700,000 British Pounds ($1.1M).

Common Abstraction Methodologies

As most corporate real estate organizations utilize brokers, in-house lease administrators, or specialist service providers to perform lease abstraction, it is worthwhile to discuss the benefits and detriments of each of these methodologies:

Lease Abstraction performed by real estate brokers: Real estate is a 'local' business and many companies hire brokerage firms to help with site selection and property transactions. As brokers are familiar with local lease norms, a common methodology is to have the broker to also perform the lease abstraction following completion of the real estate transaction.

While brokers are typically familiar with local practices and lease forms, experience has shown that broker-prepared abstracts are not always complete. My experience is that broker-produced lease abstracts average 82 percent accuracy. It is also worth noting that brokers sometimes document the 'intended' outcome of the lease transaction and not the actual legal obligations shown in the lease.

Abstraction Performed by the Real Estate Organization's Clerical Staff: A normal process for most companies who have a lease administration group is to have lease administrators perform lease abstraction. This is a good methodology when lease administrators have paralegal training and have been trained and tested for abstraction accuracy. However, experience has shown that it takes a minimum of 4-weeks of full-time training for lease abstractionists to reach 96% accuracy--so there is a significant training curve. Also, most corporate real estate groups do not have a review process to detect abstraction errors and there is significant risk of missing critical dates and options.

Abstraction performed by Service Providers: Companies that use outsourced specialists to perform lease abstraction usually achieve the highest levels of accuracy at the lowest cost. Service provider's staff are often legal professionals who have been given additional training and testing to ensure abstraction accuracy--and they have the knowledge to question unusual lease provisions. They perform lease abstraction on a full-time basis and often operate in a production-style environment. The best service providers have multiple in-process measurements and produce very high levels of abstraction accuracy.

Three-steps to Six-sigma Abstraction

Most corporate real estate organizations typically choose between these three methodologies, but, I suggest portfolio accuracy can only be produced utilizing the combination of brokers, outsourcing, and in-house lease administration to perform lease abstraction. The proposed six-sigma process is:

Step 1: Have the broker to perform the lease abstract on a standard lease abstract template. As the broker's abstract will often provide the 'intended' terms, and not necessarily the legal obligations, having the broker to complete the abstract template serves as a quality check for problems in the lease form. Since the broker should perform the lease abstract as part of performing the property transaction, there should be no additional charge for this service.

Step 2: Outsource the primary lease abstraction work to specialist service providers. Specialists companies perform this type of work on a full-time basis, and are highly efficient. Outsourced service providers can most often perform the work with higher levels of accuracy at only a fraction of the cost of having the abstraction done by in-house lease administrators.

Step 3: Have lease administrators to take a statistical sampling of the quality of the lease abstracts being received from the service provider. The process of checking dates and monetary amounts does not take too much time and also serves as a quality check of the performance of the service provider.

In summary, experience has shown that by utilizing this simple three-step process, companies achieve a 20-30 percent cost savings via outsourcing and this considerably increases the accuracy of the lease administration database. Higher accuracy will also reduce the risk of overpayment of lease-related expenses and missed critical dates. Additionally, in-house lease administraton staff can be redeployed to other activities that promote portfolio savings such as data analytics, benchmarking, and desktop audits.

Keith Roberson is Managing Director of PropertyPERFORMAX, LLC., a leading provider of business process outsourcing services in support of the property industry. Mr. Roberson has managed the abstraction of over 30,000 leases for some of the world's largest companies. Having served in senior management positions in Fortune 100 companies, Mr. Roberson now serves as a speaker and coach to property organizations in support of optimizing property portfolios.

1 comment:

  1. Thanks for sharing great tips on lease abstraction services.
    Looking forward for next article.Regards, Raju Singh