by Jeff Tosello
President, Portfolio Solutions Group

So you’ve got your leases abstracted, imaged and into a database or spreadsheet and life is good. You and your broker are handling renewals and the information to answer basic questions is at your fingertips. Then someone asks you a seemingly simple question: “What do we pay on average per square foot?” At first glance, it has a simple answer; or does it? Answering that question, you will find, reveals a great deal about how the many different ways expenses can be tracked.

Apples, Oranges or Fruit Salad? If every lease in your portfolio were exactly the same, you would not be the typical corporate tenant. Most portfolios are a mix of owned and leased properties, and the lease types range from triple net to modified gross to full service gross.* These different property and lease types, and the different types of expenses associated with each, can test your lease administration system’s abilities and have a profound effect on the answer to the question: “What do we pay on average per square foot?”

Answering the question, “What do we pay on average per square foot?,” reveals a great deal about how the many different ways expenses can be tracked.

Separating the Herd

Sorting out the various types of properties and leases is a key first step, recognizing that different expenses can be present for each and that the ultimate goal is to determine how to adjust them to a common “pool.” Clearly a full service gross lease, in which expenses are partially or fully included in the rent, must be captured differently from a net lease, in which expenses are fully separated from it. In the best case scenario, you will be able to mix landlord and non-landlord expenses to essentially create a full occupancy cost budget for each location, irrespective of the type of property, where those costs are paid from and/or where they end up in your company’s general ledger. In a more simplistic scenario you will be able to eliminate any non-base rent components to at least get a better look at using that figure as a measurement of space efficiency.

Further, you will need to be able to isolate and include or exclude locations where you have different uses if you also need to know other metrics such as cost per headcount. A 300,000 square foot warehouse with 20 employees staffing it is going to skew the numbers if that location shows up a report that includes mostly offices with 5,000 square feet and averaging 20-25 employees.

Good News

If this is your reality, at least you are operating in a position of “fine tuning” rather than just getting started. This is a step ahead of the days of competing spreadsheets, unsigned documents and trying to determine how to get to the bottom of a number of holdover or handshake deals.

Obviously the scenario painted above only represents a few considerations. Sublease income, reserve accounting, master lease commitments and rent allocation can also complicate the final measurement process.

The software tools do exist and the knowledge bank has been built for conquering this complexity. As “lease administration” or “database administration” now comes into a more professional light given its maturity and post Sarbanes-Oxley focus, management is beginning to realize that all leases are not created equal and that resources are needed for properly accounting for real estate occupancy costs. If your people, processes and tools are geared toward understanding and dealing with the nuances, answering the questions like “what is our cost per square foot” or “how many square feet do we average per person” can be questions easily answered.

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*For a more detailed discussion of gross vs. net leases, see KBA’s Article, “Demystifying the Difference between Net and Gross Leases.”