Art + Science + Business Information = The New & Improved Approach to Lease Abstracting
Lease Abstracting is the catchphrase used for the process of extracting data from a set of documents or a location file into a database. However, we all know that means much more than simply a lease and the data that is contained in it. It often also involves leases, subleases, licenses, owned properties, easements, and it involves data elements both within and external to the basic documents. Further, with the new accounting changes, the process is also including equipment leases and data that is necessary for operating/finance testing and balance sheet entries. To respond to these changes properly, an adjustment needs to be made to both “The Science & The Art” of “Abstracting”. The resulting product needs to be a useful compilation of data, information and strategic insight. Once entered and integrated into a technology system, the resulting reporting is much more powerful. Here’s how we are approaching it.
#1: The Art
There is an art to abstracting a lease that mixes the science (consistency) with how a lease is “interpreted” so that you don’t reiterate every element of the lease or just copy the verbatim language, making a 15-page summary out of a 20-page lease. It’s about balancing “too much” with “too little” and creating a reference tool, not a document that is longer than the lease itself. An abstract should also incorporate the client, or the deal makers review before finalizing, while the terms are fresh in everyone’s mind. If done properly, this integration of the abstract report can be a crisp way to kick off any number of processes that occur from the deal maker to lease administrator, including the gathering of important accounting information like general ledger codes, prepayment expenses, and tenant improvement allowances.
Further to the “creative process”, the length of the abstract, the data included, and the organization of the data should mirror the needs that drive process and reporting. This can only be done if you don’t adopt a one-size-fits-all mentality and only use the same old office lease abstracting approach to every type of lease. At PSG we have completely re-engineered our abstracting process to capture the unique requirements of our clients. This included crafting different abstract scopes varying in length and clause complexities (i.e. “short form” abstract for due diligence projects, or extended abstracts for those clients who are requesting any possible clause reviewed and reflected). Further, we also have multiple abstract templates based on the nuances and differences that exist between property types, a reminder that not all leases are the same, nor all industries require the same abstract data. PSG has a customized abstract tailored for our Medical, Industrial, Retail and Office clients that were developed to capture the differences that exist, and data elements that are important to that industry. Not to mention that there are also abstracts that are designed with the ownership status in mind – leased, versus subleased, versus owned properties. Bottom Line: The possibilities are endless when you decide to break the mold of the traditional definition of the words “lease abstract”.
#2: The Science
PSG’s approach to the tactical work often starts with making sure all of the right documents are on hand and ready for review. This includes obtaining the complete file and final executed copies, as well as coordinating translations where global leases are concerned. Any official correspondence and invoices (especially those related to establishing operating expense estimates or reconciliations) should also be included in the abstract process. Once everything that is thought to be available is on hand, the organizational process begins.
As the pieces are put together they typically reveal missing items or “exceptions”. These exceptions either need to be resolved prior to completion of the resulting lease abstract, or at a minimum, they need to be noted as their absence may lead to the wrong conclusions. Categorizing them helps “triage” what may end up as a significant follow up list.
After the exceptions are resolved and/or noted, the data extraction process can begin. At PSG, data is extracted out onto worksheets that are developed as tools for assembling the data and for quality review prior to data entry. We have developed these worksheets specifically for every database we use so that they mirror the sections, fields and input requirements of the lease administration software. The document reference, substance, quantitative aspects of the data point, and the manner in which it needs to be entered into the database for proper reporting and software functionality all need to be consistently considered. These worksheets help with this consistency, plus add a critical Quality Assurance capability NOT present when companies just hire people to open up the document and start loading data directly into a system. PSG uses these worksheets to perform a “Double-Blind” abstract of the Key Dates, Dollars and Options – the most critical elements of the extraction. Once 100% assurance is provided, the information can be entered into the system. What results is a complete and accurate account of the location and the Tenant’s rights, obligations, costs and activity at the location.
#3: The Business Data
The final important element of these new abstracts is the data that is most often requested to drive measurements, metrics and dashboard reporting. For each industry, different “external lease data” is important to drive reporting. For instance, industrial users need ceiling height to calculate cubic feet. Retailers need more information about co-tenants and contingent provisions. Healthcare providers need to monitor strict compliance and fair market value information. When the data that is important to your specific industry and reporting needs is captured in the abstract, your database becomes a wealth of information for making strategic decisions, understanding your Total Cost of Occupancy, managing your subtenant payments and obligations, etc. If this level of data is missing from your abstracts, AskPSG to explain how our experts incorporate the data that is important to your industry, property type, and business into these systems.
For the companies who are looking to abstract in-house, although increasingly they are deciding to outsource it and have staff focus time elsewhere, we want to share a few of our Abstracting Tips to help with the result:
- Build a comprehensive list of the data points that you want to capture for each lease. This step will help with Consider who will manage this data later as it changes.
- Organize the lease documents and review them in reverse chronological order. If a critical document is missing that will not allow completion of abstract, it is best to know that prior to starting the abstract. Read the Pre-amble and Declarations to give hints as to the chronology and the major documents and changes. This step will help with efficiency.
- Abstract onto a worksheet, do not abstract directly into the database. This will help with consistency and accuracy, by ensuring all of the fields have been abstracted, and nothing was inadvertently omitted. If it is omitted intentionally, state that or check “not applicable”.
- Have a colleague review your work, specifically looking at the dates, dollars and options. This will greatly improve quality in the fields that could impact decision making the most.
Having a critical eye and dedicating time to abstract these contracts has been at the forefront of PSG’s 20-year business. For more tips or assistance with abstracting AskPSG!