So, your leases have all been abstracted, imaged and loaded into a database. Renewals are being taken care of, basic information is right at your fingertips, and you’re feeling great. Then, you are asked a seemingly simple question: What is our total occupancy cost? But, just how accurate is your answer? This answer relies a great deal about the software that you’re using and also the people and processes supporting it and tracking the expenses. The following will help explain why.
If every lease within your portfolio were exactly the same, things would be easy, but typically, real estate portfolios are made up of owned, leased and sometimes sublet properties of tax lease types. The implications of this mixture and the associated expenses will likely test your system’s ability and challenge your ability to answer the questions.
Sorting through your portfolio by property type and lease type is a good first step. Remember, that the goal is to recognize which expense types are present in which system and determine how to adjust each type to a common “pool.” In the best case scenario, you can include Landlord and Non-Landlord expenses to essentially create a Full Occupancy Cost Budget for each location (regardless of where these costs get paid from or where they appear on your general ledger). In a more typical scenario, you might just eliminate any non-Base Rent components and use Base Rent as a measurement for initial space efficiency review.
Ultimately, you’ll also need to separate locations with multiple uses if you plan on looking at measurements like cost per headcount because clearly, a 300,000 square foot warehouse staffed by 100 employees will skew the numbers of a report that includes mostly 5,000 square foot offices staffed by 25 employees.
If this is your reality, don’t feel discouraged. At least you’re in the position of “fine tuning” rather than just getting started. You are one step ahead of companies with unsigned documents, trying to determine how to get out of holdovers or handshake deals.
Keep in mind that the scenario painted above only represents a few considerations. Things like sublease income, reserve accounting, Master Lease commitments and rent allocation can also complicate the final process of measuring total occupancy cost.
The software tools exist and the knowledge bank is built for conquering this complexity. As “lease administration” and “database administration” come into a more professional light, recognizing that all leases are not created equal is more common and resources are less scarce. As long as your people, processes and tools are geared toward understanding the nuances, the question “What are we paying, in total occupancy cost?” can be answered.