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Which property management software is right for you?

Choosing the Right Commercial Property Management Software

Migrating your business to commercial property management software can dramatically improve its efficiency, scalability and profitability. But with so many programs available these days, it can be challenging to know which will intuitively do what you need it to do. Take the time to do your research and carefully evaluate your options to find the best solution for your business and portfolio.

Here are a few things to consider before jumping ahead and selecting a software program.

Which features do you actually need?

It’s easy to get caught up in all the marketed features of software offerings, but it’s essential to determine your needs and then decide which plan provides the best and most robust solution.

Do you manage net leases on multi-tenant properties? Do you need the capability to budget for and calculate common area maintenance (CAM) instalments? These are integral to any commercial property management business. If you answered yes to any of these questions, you need software specifically designed for commercial (not residential, not generic) property management.

Map out your workflows

The goal here is to identify what you really need your systems to do. Think about and research effective workflows. How does information travel between people? Who knows the information the best? Who receives it first? And who needs that information to do their work?

Using a lease agreement as an example, we get the following answers:

  • The lease negotiator knows the lease agreement the best.
  • The leasing agent has the information first.
  • The property manager and accountants need that information to do their work.
    • The PM needs it to know what the landlord is responsible for maintaining and what the tenant must maintain.
    • The accountant needs to know the rental rates, what costs are recoverable from the tenant and what dates apply.

Map workflows to specific positions within your organization. Avoid directing workflows to specific individuals in your company. Doing that makes you susceptible to hostage-takers, i.e. people who threaten to derail your entire improvement process unless they get their way. These people are most easily spotted by their “black box” spreadsheets, the critical part of your current systems that only they understand.

Avoid mapping workflows to specific individuals in your company.
DILBERT © Scott Adams. Used By permission of ANDREWS MCMEEL SYNDICATION. All rights reserved.

Don’t be blindly pulled into features that already exist elsewhere

For example, it may sound helpful to have the ability to collect rent payments in a tenant portal. But really, no software can improve upon the security and functionality of existing payment services such as bank or credit card pre-authorized payments. Replicating this functionality into another workflow system is redundant and would significantly increase your licensing cost of such software. Similarly, realtors use MLS. Use the platforms where other realtors are looking, rather than using an in-house listing site with no traffic.

Payroll is already processed by external services and accounting software packages, so you don’t need it in your property management software. Instead, look for a solution that provides an interface to integrate the two applications smoothly. QuickBooks provides accounting capabilities and integrates nicely with leading commercial property management software. If one person manages parking lots and revenue, use a parking lot software system for that. Why require people to be trained and use non-standard software systems when there are already reasonable solutions available? As the saying goes, if it isn’t broke, don’t fix it.

Duplicating features already delivered with excellence by existing software is not helpful.

Ask for recommendations

Talk to colleagues and find out which systems they use. Ask them if they are happy with what they are using and, if not, why? Post questions in property management forums to get advice from your peers on the topic. Ask your employees to identify workflow bottlenecks or any areas that could improve. They may be able to offer suggestions to improve efficiencies.

Be clear in what you expect your staff to do and be reasonable in what you want them to use. Don’t look for an elusive silver bullet software package that “does everything.” Your property management software should specifically address lease administration and asset management for a commercial property portfolio. Moreover, it should be the best system for handling and automating these functions.

Systems integration versus silver bullets

Once you map out your workflows, start your search for the best solution to each phase of the workflow. All your lease administration should stem from a core solution. There shouldn’t be triple entries in lease administration software, accounting calculation spreadsheets and an accounting app.

Your expectations should also not be to find a magical silver bullet that can do everything internally. That isn’t how the rest of the world works. No one wants to learn your specific payment system in your portal because people already pay bills with their bank or their credit card or existing major payment processor like Paypal. No one wants to see your listing website with only your handful of property listings. They want to see and compare all the listings available to them in that area.

Pay attention to which workflows are dictated by natural processes in the industry (such as lease negotiation, document signing, leasehold improvements, lease administration and accounting) and which are being driven by system deficiencies (such as passing paper invoices around for review and approval signatures). Natural processes are good, so keep those. You will want to research better solutions to address the system deficiencies.

Watch for discontinuities between workflows. For example, land development is its own process and has a distinct separation from ongoing leasing and property management activities. A single solution will not work for those two workflows.

Transactional versus relational processes

Consider the differences between transactional and relational processes. Lease negotiation is transactional. You will no longer require the leasing agent, lawyer or realty listing once the lease is executed. Property management and lease accounting are relational. There is an ongoing relationship between the landlord and the tenant that will exist for many years. The requirements of those types of workflows are too different to be effectively addressed in a single solution.

Your goal is to identify which solutions are already effective with widespread acceptance and see how they integrate into the systems you think will work best for your workflows. Build your processes to meet the requirements of your workflows.

Organize your current business processes

So, you know you need to automate your processes. You know that informal accounting processes, such as relying on stand-alone spreadsheets or using accounting programs that are too generic for net lease administration, hold your business back. Review your current system to understand what you need to do to prepare for a software migration.

The amount of effort to transition to a new system depends mainly on the state of your documentation and business processes. It will take you much longer to prepare for the change if your records are disorganized, duplicated or incomplete. Are your records stored in multiple formats, including Excel spreadsheets, Word documents, off-the-shelf accounting software and paper files? Are your lease agreements contradictory (we see this often) or otherwise unclear? Collect all leases and invoices, find missing information and correct any data inconsistencies and errors. Update them with any addendums and changes that may be required. Cleaning up and streamlining your data is the key to a smooth transition. While you’re at it, update tenant contacts and addresses for notifications and move tenants to online payment systems.

Moving to new property management software can dramatically improve your business systems. But it doesn’t magically happen with the click of a purchase button. It takes a little thought and time to transfer complete data into a database. The result is that inefficient internal processes upgrade to a fully efficient, transparent and accurate workflow. Smart commercial property management software will actually establish or improve your strategic business behaviours and decisions.

Are your timelines realistic?

Now you know that migrating to a new system that improves your business workflow will not be instantaneous and thought-free. Sophisticated and automated processing systems require some data migration and account setup. Block time for data collection and entry. You will need to validate, gather and enter a variety of data. Besides entering the primary business data, your clients’ information also needs to be input into the system.

Schedule in time to set up user roles for staff, owners, tenants and others. Think about your current workflows to identify the staff members who will work on the new system. Review each employee’s position to understand the objective of their work. Is each function assigned to the right person, or does it make sense for other people to be responsible for specific tasks more relevant to their actual job? Plan to provide some instruction on how they can access, use and benefit from the new software. Consider allotting time for employees to receive training on the optimized workflow and software use.

Now you’re ready to consider new commercial property management software

You’ve gathered your files and read through your leases. Your business records are organized. You understand the need for a reasonable setup process and timeline. You are ready to take the leap!

There are three main areas to consider when selecting a new property management software package. Here are some recommendations that can help you decide which is best suited to your business needs.

1. What’s included?

You’ve defined your requirements, so now you can assess your options based on this list of must-haves. Commercial net leasing is relatively similar in scope, regardless of business size. Every commercial property landlord needs to track capital and operating expenses, contracting costs, budgets, reconciliations, cost recoveries and various lease terms. However, each software vendor offers a variety of features.

For example, some key elements of property management software include:

  • Lease management
  • Document management
  • Standardized administration and documentation
  • Automated workflows
  • CAM allocation and recovery processing
  • Expense management
  • Searchable records
  • Automated notifications
  • Budgeting
  • Reporting functions
  • Digital “sticky notes”
  • Customized roles and permissions
  • Online service requests

Not all software programs may include these features, so take the time to identify the functionality you need to ensure optimal efficiencies. Also, ask whether the pricing plan provides everything you need. You don’t want to find out that you’ve paid for a basic package, but the functions you need most are only available for an extra fee or in a premium package.

Functionality

One ultimate goal of using a property management software program is to automate your commercial net leasing workflow processes. A program with generalized automation cannot process unique transactions, and it creates more work for your staff. You want to make sure that you leave the Excel spreadsheets and the calculators behind once you migrate to a new system. It should automate the most complex calculations for you in an instant.

Your software must have capabilities that meet your management and reporting requirements. Otherwise, it’s not worth the investment. The most efficient software will offer automation of property data, leasing, budgeting, rent, CAM fees, reconciliations, property management fees and reporting. It should also support every kind of property in your net lease portfolio, including office, retail, warehouse and industrial. Additionally, it needs to integrate with an existing accounting system to achieve maximum workflow automation.

Cloud-based or desktop installation?

Another decision you will need to make is whether you want to buy software out of a box or move up to a cloud-based system. Cloud-based technology is generally more affordable than desktop software. It also makes it easier for staff to work remotely and keep data centralized and updated with the latest information. But some companies are still reluctant to trust the cloud for security reasons. That said, cloud-based systems typically utilize enterprise-level hosting services such as Microsoft Azure, Amazon or IBM, which provide a much stronger protection level than can be implemented at the local level.

Software installed on a desktop computer does not require an Internet connection and therefore is not affected by connectivity issues. Still, local users are responsible for backing up the data, and not all information updates simultaneously. Furthermore, desktop software can only be used on the computer it’s installed on, whereas cloud-based systems can be accessed from any device, anywhere. While this may be a personal choice for smaller shops, cloud-based solutions are typically more cost-effective and offer essential teamwork flexibility required by growing firms. If you’re still not sold on the benefits of cloud-based computing, this article may help.

Go for a test drive before you decide

Many vendors offer free demos or trial periods to use their software. Take advantage of this opportunity and choose two or three to evaluate. Demos and trial periods will allow you to see exactly how the software works and give you a feel for the functionality. Note that software that robustly automates your workflow requires some setup. Therefore, sophisticated software companies will offer demos rather than less-helpful trial periods.

Book demos to be sure the software automation will improve your workflow efficiency.

During this time, look for clues as to how intuitive the system is. Does it reduce steps, or does it seem more complicated than your existing processes? You want to choose something that makes the workflow as efficient as possible. Make a list of pros and cons for each and compare how each one satisfies your requirements. Doing your research will help you make an educated decision and give you a better sense of which features are most important to your workflow.

2. What value does it offer you?

Property management software is an investment in your business and should be treated as such. Do some research into property management software’s average cost and develop a realistic budget for software setup and ongoing licensing. Investigate the different plans available and what you get for them. Is the fee a one-time payment, or do you make ongoing monthly or annual payments? Does additional functionality mean additional fees?

Ask whether new versions and upgrades are included or whether your purchased version will get left behind. Does the investment increase team efficiency and make them available to be more productive? Is the software’s cost overshadowed by the financial gains such as eliminated slippage, faster annual audits and increased revenues? Is lease compliance instant and easy to validate? Do the math to make sure you are getting the most for your money.

How many licences do you need?

Many programs are licence-based, so knowing exactly how many licences you require will save you money. Make sure you take inventory of how many users need to access the program. Don’t forget external users such as tenants, accountants, lawyers and property managers.

However, bear in mind that it is easy to overestimate how many users need licenced access. For example, let’s consider a property management company that relies on 15 people. Two are property owners who only need access to reporting, one is an external accountant and three are realtors who use MLS and Argus for their daily tasks. Four others are maintenance staff. The remaining team members include three property managers, a lease administrator, a bookkeeper and one receptionist. With CRESSblue, the company actually only needs one professional and four standard licences instead of the 15 they initially assumed. Ask the vendor to break down the level of access provided for each licence type to help you calculate what you need. Investigate how much additional licences will cost if you do take on new employees at a later date.

A 15-member team may actually only need 5 to 6 primary user licences.

3. Are training and support available?

No matter which software you choose, the company should stand behind their product and lead your team in the setup and implementation phase. If the company expects you to execute it yourself, be wary. A trustworthy software provider should provide a setup plan for the rollout, and their support staff should be well-versed in the industry. They should also provide documentation, support and training. Do they offer after-hours on-call support for any emergency issues? Find out whether support is included or available for an additional fee.

How is support delivered? Can you access help via options such as online meetings, phone, chat, e-mail, built-in help, videos or one-on-one support? Are in-house training sessions available? The best software companies will offer a wide array of options to support you and your team throughout the transition period and beyond.

Now it’s time to get to work

As you can see, choosing a property management software requires planning and research to ensure that you select the best-suited program for your needs. The right software is the one that does everything you need and does it intuitively, effectively and efficiently. We’ve created a checklist that can help make your decision easier. Download the “How Do I Decide?” worksheet to evaluate the six critical areas to consider when evaluating software for your commercial property management business.

Choosing the right property management software can propel your business to a new level of efficiency and scalability. The long-term benefits—saved time, increased income and enhanced professionalism—far outweigh the time investment to set it up and the annual licensing cost. With a bit of research and careful evaluation of your options, you can find the best solution for your business and portfolio.


Disclaimer

This article is for informational purposes only and is not intended as professional advice; please consult a competent professional for advice specific to you. This blog is written to stimulate thinking on concepts related to commercial leasing. Please join the discussion with your experiences.


Martin Sommer, CEO, CRESS Inc.

Follow me on LinkedIn

Martin is a founder and the CEO of CRESS Inc., a Canadian SaaS company that automates lease administration and asset management. Martin also manages Karanda Properties Limited industrial portfolio as Director of Operations in all areas of commercial property management, including new development, asset management, capital expenditures, operations, leasing and lease administration of the industrial portfolio. Martin writes about property management workflow and issues. Book Martin to speak at your industry event.

Better Software-as-a-Service technology equals happier customers.

5 Ways Software-as-a-Service Can Enhance Customer Service

If you are a small to medium-sized CRE PM business owner, no one knows your customers as you do. So, it should come as no surprise that technology is disrupting traditional customer service models – in a big way. Cloud-based Software-as-a-Service (SaaS) is making its biggest splash ever. But going digital does not mean getting less personal.

Digital technology is drastically altering the power balance between customers and companies. According to Forbes, digital transformation with a focus on customer experience can generate a 20-30% increase in customer satisfaction and economic gains of 20-50%. Sounds like a win-win, right? Digital technology allows customers to gain the power of information and choice while increasing business revenue.

Property managers have even more of an incentive to make the digital leap. Digital workflows can reduce overhead costs, speed up leasing processes and increase response time – just to name a few advantages.

So, how do you offer quality personal customer service in the digital age? Let’s explore 5 ways property management Software-as-a-Service can enhance customer experience.

1. Access data anytime, anywhere

Even if you’re the sole property owner of one building, it’s likely you still have a stockpile of data. Think about all the information you’re given on an annual basis. Leases, legal contracts, utility bills and receipts must be readily available on hand. Companies of all sizes can reap the benefits of asset management software.

Property management systems offer unparalleled access to accurate, up-to-date, real-time data about your buildings. Common in old-style business workflows, personal data sets are typically on individual computers manipulated by a single person with their complex spreadsheets. This produces single-source, unverifiable data that easily propagates errors throughout the entire company. Eliminate the round trip of individual departments producing piecemeal paperwork in scheduled increments. Expedite the customer experience with centralized systems that provide immediate access to all data sets simultaneously.

In times of uncertainty, the speed of access to data is vital to decision-makers and stakeholders.  Landlords using property management software can respond faster to changing conditions and benefit from automated tools and reporting features. CRESSblue is an example of a specialized Software-as-a-Service system that offers tenant and owner portals. The tenant portal allows tenants to easily access invoices and statements through an online system. The owner portal functions similarly, enabling property managers to access invoices and statements and see property management reports.

Ability to access data anywhere at anytime

Furthermore, forward-thinking owners get the insights stakeholders need with access to comprehensive reports and ROI analytics. By applying business intelligence technology to these sources of data, you can mine them for patterns you never knew existed.

2. Take human error out of the equation

Looking to build a loyal customer base? Transparent and accurate reporting is non-negotiable. Who would want to do business with a landlord that fudges numbers on spreadsheets? Smart tenants demand more transparency from landlords on CAM cost allocations and calculations.

Manually tracking expenses leaves too much room for error. When it comes to managing other people’s money, you can’t afford to make mistakes. If you’re a landlord that runs multi-tenant properties, then you know all too well how difficult it can be to track financial information. Add custom lease terms, tenant inclusions/exclusions and cost recoveries to the mix – and the paperwork can pile up fast.  Here is an example of some of the lease errors that we’ve come across in paper-based systems:

Paper leases leave room for error.
The lease Basic Terms Sheet shows 1,050 included square feet.
There is more room for human error on paper.
But later in the lease, in Section 2, two other numbers are provided for the included square feet.

Landlords using accounting software have the clear advantage. Automation reduces the risk of human error, so you don’t have to dig through files to identify (and correct) mistakes. Digital workflows give you the option of automatically logging financial data, which takes all the guesswork out of the task.

Commercial leases are complex. Commercial property accounting software offers ease-of-use when managing cost allocations, requiring less customer involvement and accurate results. Unique tenant circumstances can be reconciled efficiently and painlessly. Deliver information confidently and professionally, with internal audit capabilities to assure tenants that their finances are in safe hands.

3. Self-service optimization

At one time, ‘self-serve’ was a dirty word. But in an age where technology offers instant access to information, self-service is an integral part of customer experience. Streamlined, user-friendly portals empower customers to get the answers they need without enduring long wait times and dreadful hold music.

What’s more, services like online payment and maintenance request submission can cut out the middleman. Landlords can promptly respond to tenant concerns. Cloud-based software, like CRESSblue, offers tenant portals with messaging systems that can alert landlords to a problem immediately. Owners can respond to tenants, message team members, schedule work orders and track maintenance tickets to ensure timely service is delivered.

Companies that embrace technology allow for greater communication amongst the team. Effective internal communication boosts morale, employee engagement and information sharing. Coupled with these benefits, integrated workflows that centralize and standardize your data also reduce customer follow-ups for additional information. In turn, this results in fewer direct calls, fewer tickets and happier customers.

The best part of all? It’s cost-effective. Keeping investors, landlords and tenants happy improves retention, minimizes vacancy and maximizes revenue.  

4. Customers want to make green choices

Consumer research shows that customers find it important for businesses to demonstrate social responsibility and take stances on current social movements. According to Business Insider, a recent survey found that 47% of internet users worldwide had ditched products and services from a brand that violated their personal values. Protecting the environment tops the list.

Not only does going paperless help the environment, but it also significantly reduces operating costs. You can cut out the expense of printing, storage and the transportation of paper itself. No checks to print, stamps to lick or envelopes to stuff. Swap the unnecessary administration time – in favour of secure, digital files that are easy to search. Still not convinced? As a tenant, would you prefer a firm that constantly delivers notices through your mailbox or one that simply sends emails straight to your phone?

Most important, digital information storage greatly reduces the risk of paper documents ending up in the wrong hands. Enterprise-level Software-as-a-Service systems like CRESSblue, lock sensitive information down and control access to files with user credentials. Real-time monitoring of the system health and intrusion detection ensure that records are securely backed-up and intact. Unlike paper, which can be destroyed, lost and never returned.

Lock down sensitive information and go paperless

As businesses plan for the post-coronavirus future, more owners are converting physical offices into remote property management teams. Remote working is an opportunity for companies to work more sustainably and increase productivity. Think less office space, less commuting, fewer business trips, shorter breaks and greater focus for employees.

5. Increased productivity equals more time for better service

Companies that leverage data-driven decision-making are far more productive than companies that rely on low-tech solutions. By investing in technology, owners are free to look beyond day-to-day operations and focus instead on property management leadership.

Automating complex processes and repetitive tasks saves valuable personnel hours. Adopting cloud-based Software-as-a-Service technologies increases business intelligence while decreasing administration time. These tools will enable you to effectively and productively improve internal processes and deliver professional service.

Phone calls, faxes and paperwork will only slow you down. And that will ultimately hinder your stakeholders. With smart business systems, you can automate e-notifications and reminder emails, as well as digital reports and documents.

The benefits of the cloud go beyond increased productivity. Digital and analytic tools can reduce the cost of operations while fostering flexibility. Smart business systems do the heavy lifting, so you can focus on strategies to boost your service level and ROI. Take pride in knowing your business is using tools to accelerate and scale. 

Start with your customers

The rules of business are being rewritten nearly every day with this imperative for digital transformation. There’s no denying that customer service is changing too. The current global climate has forced companies to rethink how customer interactions are handled, performed and tracked.

Emerging Software-as-a-Service technologies present an incredible opportunity to make customer service more natural, authentic and emotionally intelligent. Not surprisingly, customers value total convenience. What systems can you leverage to meet their evolving needs?

Commercial property management software rewards customers with easier, more efficient and ultimately, more responsive service. It’s your job as a business leader to apply tools to engage, connect and grow relationships. You owe it to your customers.

Investing in technology allows you to focus on customer service leadership

Embrace Software-as-a-Service

“Digital transformation” was a buzz phrase before the coronavirus crisis. Since then, it has become a necessity. Leaders must continuously reinvent their customer service model – with technology at its core. Otherwise, watch from the sidelines as tech-savvy customers are swept up by high-tech competitors using innovative Software-as-a-Service solutions.

Customers have already become accustomed to the digital experience. The demand is growing strong. They expect new standards of excellence, performance and just about everything in between. Failure to adapt will risk a loss of efficiency and frustration among your stakeholders.

Digital transformation is modernizing how companies work and compete in an evolving digital economy. What’s also evident is that executives are, by and large, prioritizing technology in their business goals. Not investing in remote systems will have far-reaching consequences on the way you work when the pandemic dust settles. Are you ready for a fresh customer service strategy?

Book a demo to learn how CRESSblue cloud-based property management software can help increase your profitability while cutting costs and positioning your business as an industry leader.


Disclaimer

This article is for informational purposes only and is not intended as professional advice; please consult a competent professional for advice specific to you. This blog is written to stimulate thinking on concepts related to commercial leasing. Please join the discussion with your experiences.


Martin Sommer, CEO, CRESS Inc.

Follow me on LinkedIn

Martin is a founder and the CEO of CRESS Inc., a Canadian SaaS company that automates lease administration and asset management. Martin also manages Karanda Properties Limited industrial portfolio as Director of Operations in all areas of commercial property management, including new development, asset management, capital expenditures, operations, leasing and lease administration of the industrial portfolio. Martin writes about property management workflow and issues. Book Martin to speak at your industry event.

Formalizing processes for maximum wealth with asset management software.

Formalizing Business Processes with Asset Management Software for Maximum Wealth Creation

Small landlords with just a few buildings own most commercial property. Often, these landlords share a similar pathway to becoming landlords. Initially, they purchase real estate assets for their business operations. Over the years, they add a few more properties as their business and personal wealth increases. Their idea is to use real estate assets to diversify their investment portfolio, but their original business operations remain their primary interests. The property acquisitions are of secondary importance, valued as passive investments and loosely managed. They haven’t yet invested in asset management software.

And therein lies an important – and costly – gap. 

The fact is, there is a significant difference between real estate and other forms of investing. Financial investments such as stocks, funds and REITs have people that can manage all aspects of the investment independent of the owners. Real estate, on the other hand, is more like a business than a simple financial instrument. Commercial real estate is much more complex and requires active management by a variety of professionals, as well as dedicated asset management software and systems, to achieve full yields. It’s worth it, though, as correctly managed real estate can potentially provide higher returns than the other investment types.

What is an informal landlord?

Let’s get clear on what an “informal” landlord is. It’s not about size. The informal label refers to the management style. For example, a large company might lack formal procedures and comprehensive data management. Meanwhile, a smaller property management company might run with precise data control and efficient vertical integration. In this scenario, the larger company is actually the informal landlord.

Your team of industry professionals is vital

Every business uses industry professionals to meet the need for particular expertise and licensing. Small and even mid-sized companies rarely have all the required professional associations represented internally. Licensed professional agents and brokers assist with securing the best commercial real estate lease opportunities. Lawyers draft and review lease agreements that provide the best protections. Accountants prepare essential financial statements and file the annual corporate taxes. Property owners contract these external specialists when required and often view them as long-term, trusted business associates.

Professional engagement with external PM industry experts opens you to better opportunities.

But these industry professionals can’t replace you

These professionals are essential in the success of your property management business. But they can’t provide the kind of central leadership that maximizes your wealth creation. Only the business owner can meet the business responsibility to lead, ensure the use of proper asset management software and processes and bind all these various responsibilities together. If the real estate is being passively owned like an investment rather than a business, the generation of wealth will be limited.

How the informal management style limits your wealth creation

Let’s peek inside the operations of a hypothetical (but very common!) informal landlord. We see that the owner has internal staff that run the primary business. With the acquisition of properties, they inherit the added responsibility of administering the daily operations of the properties. None are specifically trained or experienced in commercial property management.

Sure, this has immediate cost savings in terms of paid labour. Unfortunately, it creates far greater losses in other areas, to the point of making the investment neutral or even a loss to own. Moreover, the informal landlord may have no idea how their properties are actually performing. How could they? A line or two in the business annual financial statements contain no relevant information on the state of the property management operations. 

Some losses incurred by the informal landlord include incorrect calculations, costly administration and audits, and lost recoveries.

So, what are these great losses that the informal landlord is suffering? Let’s now consider each of the key gaps that exist in informal real estate management. (We assume that our readers have some experience with owning commercial property. If you are new to commercial property ownership, you can read about the basics here.)

Let’s talk about CAM slippage

The primary factor in the annual performance of commercial real estate is the handling of the operational costs for the property. For the informal landlord, the problems with recovering costs occur long before the calculations start. The biggest issue is trying to make sure the invoices for the year are all included. Often significant recoverable expenses are simply overlooked. Even some as large as the property taxes – which typically comprise most of the additional rent amount – are missed. 

Dedicated asset management software, such as CRESSblue, prevents missed recoveries in two ways. One, the invoices are tagged to the property and tenant when they are entered for payment. That means nothing is overlooked. There is no hunting for the expense documents when it’s time to do the year-end annual reconciliation. There is no mad scramble when lenders or governing bodies request reports. Two, the software automatically performs the calculations. With this kind of professional system, there are no miscalculations or missing expenses that result in slippage.

Knowing who pays

Aside from missing invoices, there are a few other ways legitimate CAM expense recoveries go missing on the statements. Invoices often have poor work descriptions. They also can have mismatched addresses, where the tenant name doesn’t match the unit number. Nearly a year later, can the person doing the reconciliation remember what the invoices were for? What happens to invoices where you cannot figure out whose CAM statement they belong on? They get left out of the calculations to avoid embarrassing questions from the tenants. It feels safer to forget about them rather than respond to questions over poor paperwork. 

Knowing which expenses are recoverable

Another common problem in an informal system is the separation between the various parties involved in business operations. The property owner decides on the maintenance work to be done. The company bookkeeper, although skilled in the primary business activities, often has little or no experience in commercial property management. 

That person rarely has access to the leases or understands the legal language. Who interprets what expenses are permitted to be recovered based on the lease agreement terms? Small landlords rarely have skilled internal staff that commercial leases require to make this type of decision and effectively manage the business. 

Sure, successful property management comes with procedural and document complexity. But the right asset management software makes it much easier. Alternatively, ignoring the entire issue and neglecting proper data management because it just looks too complicated results in significantly reduced potential return on the investment.

Knowing how to split shared costs across multiple tenants

Even if the invoices clearly describe the work and where it was done, further complexity lies ahead. Proportional expense allocations for multi-tenant properties can be complicated, especially when there are renovations, vacancies, tenant changes and a variety of free rent exemptions during the budget period. We won’t get into the details of how to calculate the proportional cost allocations for multi-tenant properties here. We covered that in another article.

The right asset management software makes expense allocation easy 

Dedicated asset management software makes a huge difference here. Vendor accounts can be linked to specific property locations. This is especially useful for accounts that never change, such as utility accounts. It also provides significant time savings as well as eliminating the potential for allocation errors. The software can automatically calculate the proportional share of the expenses for each tenant based on the premise’s areas. 

Going one step further, CRESSblue software will screen the expense allocations for eligibility as defined in each lease setup. The combination of the linked vendor accounts, automated calculations and lease screening eliminates all losses previously incurred from those sources. These losses alone are often three to four times the annual costs for the software, making the financial decision an easy one. 

Keeping track of lease dates

Rental increases

Most commercial leases have provisions for rent increases during the term of the lease, either specified step-up amounts at various intervals or annual adjustments for inflation tied to a consumer price index. These rent increases are often applied late or missed entirely. Without a system to provide notifications about upcoming rent adjustments, the same rental invoice goes out each month without anyone checking the leases left in a filing cabinet. Good luck trying to collect all that missed rent when the lease term has expired, and someone finally notices the initial rent was never changed. 

Lease management

Aside from missed rent money, how about letting tenants and realtors know when the lease term is up? What about notifications about upcoming extension options? Proper commercial asset management software has all these features built-in, providing timely lease management notices to landlords and tenants alike.

Knowing where stuff is

Document management is another crucial feature of any professional business software solution. It is easy to add documents to a tenant’s records library, as most documents are exchanged digitally now. Combined with online software services, anyone who needs access to the documents can do it at any time. Property records are handled the same way, with drawings and tenant fit-up specifications available for the realtor listings and maintenance personnel. Online document storage means you no longer need to remember to look something up when you get to the office as you have access anytime and anywhere. You can also send copies to your lawyer, accountant; you get the picture. Documents are there, and they are available.

Letting people know

Of course, good commercial asset management software solutions provide multiple user roles. With CRESSblue, it isn’t one-size-fits-most. The access and editing rights of each role are customizable. A large company can establish access parameters for roles such as building managers, property managers, portfolio managers, regional managers, asset managers, capital expense managers, department managers and division VPs. A smaller company will have most of these positions vertically integrated into a handful of people and can assign accesses accordingly.

Remember those transaction records your accountant wanted to see? You don’t need to send them; they can log in and get what they need. Customization is standard, with specified roles and permissions giving advances in efficiency other methods can never achieve.

Reporting

If only you had professional reports! Perhaps it would save some time on the telephone, trying to explain what you meant on that annual statement you had sent over to your tenants. What is on a “standard” statement anyway? What do other landlords have on theirs? These are common questions, and they indicate that you could use professionally laid out statements and standardized reporting.

Keeping lenders happy

While we are talking about reporting, what about the property rent rolls and operating statements your mortgager asks for every year? Commercial property management systems also instantly generate those. Property reports are also useful for getting insurance quotes. 

Say no to avoidable loss

None of the above is news to anyone who has worked in property management. At one time or another, most of us have experienced at least one of those slip-ups. Commercial property leasing involves large sums of money, and any mistake, whether accidental or deliberately taking losses, is costly.

The larger the informally-managed PM portfolio, the greater the total loss.

As odd as it seems, informal landlords normally accept recoverable expense losses every single year! Those losses are typically several times more than it would cost to implement a professional commercial software system. 

At some point in the decision to purchase commercial real estate, consideration was given to the investment potential of the property. How does an otherwise successful business person end up taking avoidable losses on their real estate investment year after year?

Understanding systems inertia

Small commercial landlords typically acquire their real estate portfolio scale later in life. Understandably, they do not want to invest significant time in learning an entirely new industry at the time they would be expecting to enjoy the rewards of their business growth and investment wealth strategies. 

The business systems of their primary business now serve secondary duty as real estate management systems. This is despite the fact that they are clearly inefficient and ineffective for that purpose. Perhaps the landlord doesn’t know the scale of loss. However, the recognition that it isn’t working well is no mystery to anyone.

Effective and efficient enterprise-level business systems able to automate critical business functions require quite extensive initial setup. Any business system looking to provide software services to smaller landlords must also include a significant amount of the initial setup as part of the package deal to ease clients through that transitional period. Look for a software company that is relational rather than transactional in the sales process. The days of boxed asset management software are long gone. Today’s software continually receives upgrades and updates. Your solution provider should be a business partner with an ongoing support relationship. 

Professionals want to work with other professionals

Compounding the above-mentioned risks is another significant gap for informal landlords not using professional commercial business systems. As we touched on, your commercial property management company relies on external industry professionals that offer unique expertise. The main three main types are realtors, lawyers and accountants. To be confident in the performance of their responsibilities, each needs specific types of information. Giving them what they need, how they need it, lets them spend their time more efficiently, opens you to better opportunities to which they have access and improves your credibility with them.

What real estate professionals want from landlords

Real estate professionals want their landlord clients to have information available and accessible. They need to know:

  • That the landlord has the lease agreements, is familiar with them and adheres to them
  • They are getting timely notifications of lease terms expiration, extensions options and new listings
  • The policies for the property, such as signage, security, waste handling and package deliveries 
  • The specifications on the premises, such as:
    • Supplied utilities like heating and cooling, electrical power and communications
    • Door sizes, numbers and types; and dock levellers
    • Zoning, permitted uses and prohibited uses
    • Exterior storage
    • Hours of operation
    • Drawings, space designs, space layouts and finish schedules

Having accurate and current information readily available makes the realtors work much easier. People like to work with other people that reduce stress and required effort. Be one of those people.

Realtors also look at potential landlords’ professional standards to see if they will impact the realtor-tenant relationship. This is especially important if the tenant is a national or multi-national client, and there is an opportunity for repeat business. Landlords that fail to meet professional standards for accuracy, timeliness and reporting create lost opportunity. The tenant account may go to a competitor if the tenant feels the realtor misrepresented its interests in a deal.

Missing out on high-value tenants means the landlord must take higher risk tenants. National and multi-national tenants have good covenants. They are low risk for defaults and pay their rent on time. Missing out on the opportunity to attract these kinds of tenants significantly increases the landlord’s overall default risk. For a landlord with a small portfolio, this can wipe out the returns on the real estate investments for an entire year.

What lawyers want to see

Lawyers like clients that, at the very least, know where their legal documents are. Do you know what is even better? Clients that operate within the scope of their agreements and meet their commitments. 

What is the area of highest tension between landlords and tenants? Operating costs. Defaults are rare. So are insurance claims. But everyone constantly deals with operating costs. No one enjoys conflicts over which expenses are legitimately charged back to the tenants.

This is where CRESSblue makes a notable difference. The terms of the operating expense recoveries in the lease agreement exist in a logical framework for processing expenses. The lease moves from being a static document in a filing cabinet to an active system automatically applying and adhering to the commitments made by the landlord. Any changes to the original lease setup automatically trigger a flag for review, so nothing slips by unnoticed.

If you want to avoid conflict over expense recoveries, put a system in place that automatically makes the best practices your default workflow.

What accountants need to know

Of course, all accountants want to see complete and accurate accounting. Rental income and expenses are the core of every financial statement, and CRESSblue links those to the tenant and property. External accountant professionals preparing financial statements under a review engagement commitment for a client will want to see the documentation for anything that creates a significant change to the balance sheet.

CRESSblue has a complete asset management capability with the ability to track assets and associated equipment. It also has fully customizable capital cost allowance functionality to track depreciation per federal and provincial or state regulations.

You create capital assets in the property database. In addition to calculating and tracking depreciation for tax purposes, you can link properties to individual leases. If the lease agreement permits capital cost recovery, the software can automatically add them to the expense recoveries similar to the operating expense recoveries.

Information access is greatly simplified for external accountants. As CRESSblue is an online application, accessing the data live from the server is simple. Depending on the level of service provided, access can be read-only or include full editing rights. Accounting review engagements requiring data verification and validation have never been so easy.

Formalizing property management for maximum wealth creation

Only you can effectively fill the responsibility to lead in the management of your property portfolio. Owning real estate investments is not as simple as holding a stock fund. If you view your real estate as a passive investment rather than a business, your potential wealth generation is lower than it could be. These case studies demonstrate how formalizing property management with better business systems results in significant gains.

Formal property management systems optimize wealth and professionalism.

Through your leadership, you can upgrade your operations with industry-specific software that delivers business systems and automation that encompass the full scope of commercial property management. This brings incredible efficiency to your business, in addition to control, accuracy and professionalism. Moreover, CRESSblue allows your internal team to manage your business with surprisingly little ongoing input from you. Professional operations and reporting are attainable by any landlord, big or small. Maximizing your wealth creation is within reach. You need only to decide to be professional.


Disclaimer

This article is for informational purposes only and is not intended as professional advice; please consult a competent professional for advice specific to you. This blog is written to stimulate thinking on concepts related to commercial leasing. Please join the discussion with your experiences.


Martin Sommer, CEO, CRESS Inc.

Follow me on LinkedIn

Martin is a founder and the CEO of CRESS Inc., a Canadian SaaS company that automates lease administration and asset management. Martin also manages Karanda Properties Limited industrial portfolio as Director of Operations in all areas of commercial property management, including new development, asset management, capital expenditures, operations, leasing and lease administration of the industrial portfolio. Martin writes about property management workflow and issues. Book Martin to speak at your industry event.

When to make the leap to new commercial real estate investment software.

New Commercial Real Estate Investment Software – When to Make the Leap

What factors hold you back from making decisions on new business systems? Have you been holding back from upgrading to commercial real estate investment software? Let’s take a look at the common causes of inaction and how to address those fears.

The case for leaping forward with specialized commercial real estate investment software

Without a doubt, there has to be justification for transitioning to new business systems before arguing when to make the transition. To that end, we have previously made a case for new business systems. Not utilizing the right tools can strangle a business, severely reducing responsivity and profit. Interestingly, Forbes Technology Council lists 11 signs your software is due for a major update. Let’s dig specifically into the key reasons you should move forward with commercial real estate investment software designed for your business.

Centralized business data

Centralizing data collection allows for quality control.

Sources of data are everywhere now – in leases, abstracts, offers, contracts, agreements, invoices, term sheets, building operations and many others. The issue isn’t the quantity of data that can be collected. Instead, the issues with data collection and use are:

  • Data quality
  • Data integrity
  • Data aggregation
  • Data control
  • Data assimilation
  • Data dissemination

Data quality

Quality data can only exist with accurate and reliable collection. Further, the data must be relevant and suited for individual transactional use. Furthermore, the data must be qualitative and not just quantitative.

Data integrity

Data integrity involves encryption and user security controls in the software itself. What’s more, data validation can be done utilizing incremental change tracking for irrational or outsized changes (i.e. upon entering a 10% rent increase when the typical rent increase is 1% to 5%). Another method is to set data input limits for the expected values. On the human side, there are data governance policies to ensure that the data is collected and maintained accurately and consistently. More than that, though, the reliability of the data must be verifiable. This means that the source materials need to be readily available, typically in a digital format. It isn’t enough to have a spreadsheet of aggregated data. Unquestionably, the source documents must be accessible to verify the aggregated data.

Data aggregation

Data aggregation (collection and organization) from disparate sources must be done consistently through the use of systematic processes and repeatable workflows. Individually created spreadsheets are demonstrably the worst means of collecting and collating data due to the single user creation and the inability to display verifiable data sources. The consequences of segmented data can be devastating. For example, one property management company and its tenants discovered that it had erroneously overbilled for years:

Location 1
Original Square Footage171,422
Actual Square Footage157,568
Overpayment Over 53 Months$170,047.11
Location 2
Original Square Footage41,960
Actual Square Footage36,634
Overpayment Over 53 Months$120,239.84
Total Overpayments $290,286.95
Paper systems leave much room for human error and mismatched data, as demonstrated above. The consequences can be crushing to both reputation and cashflow.

In contrast, compare a spreadsheet of data to a database where every number links to a digital source document for verification purposes. In addition, each number that exists in isolation in a spreadsheet directly links in a database to the tenant, premises and accounting transaction history. Together, the aggregate data presents a total, accurate picture.

Data control

Setting controls on the data are critical for two key reasons. One, the data is now much more valuable in its curated form that it was in the various disconnected sources. Two, no one user should have singular control over the data. This is important both for maintaining the quality of the data and for preventing internal fraud.

Data assimilation

With the collected data now in a consistent, verifiable manner, a sophisticated Software-as-a-Service (SaaS) solution will assimilate it into the relevant areas of the business decision-making process. The data is collected once, curated and then made available for all. These unified data sets enable consistent business decisions. Siloed data systems with multiple duplicate data entry points, on the other hand, lead to inconsistencies in both the data and decisions based on them.

Data dissemination

The final step for the effective use of data is to disseminate it to the right people at the right time. Accessibility to the central data repository is key to making use of the data while it is current. The speed of access is vital to decision-makers and stakeholders, enabling them to respond faster to changing conditions or make changes to stagnant positions.

The centralization and control of quality data is likely the most significant immediate benefit you will realize when switching to a commercial business system.

Increased business knowledge through integration

Commercial real estate investment software made specifically for your business gives executives and managers access to a much more complete set of data. Centralized business systems provide access to all data sets simultaneously. They do not rely on individual departments making data available on scheduled intervals, such as monthly or quarterly reports. Not only do decision-makers have better data faster, but they also benefit from specialized insight and reporting tools. This makes for much quicker analysis and leads directly to more accurate and timely decisions.

Vastly improved efficiency

Business workflows and tools built into the systems benefit from standardization in all areas. This includes data entry and processing, allowing multiple users to enter data while the system processes that data independently of the user. Old-school spreadsheets hold individual user data inputs until they are blindly handed over to the next person. Additionally, paper-based systems leave room for messy documentation, like this illegible lease document:

Lack of legibility in this paper document created a billing nightmare for the companies involved.

SaaS-based, commercial real estate investment software, on the other hand, allows multiple users to enter clear data that is immediately available to all relevant users. Moreover, your team benefits from standardized data input forms and consistent reports.

Better investment returns

Obviously, another primary outcome of all the business process improvements is ultimately to increase ROI for the company. This objective is easily achievable in conjunction with improved work systems for all the staff when using enterprise-level, dedicated business solutions.

The impact of increasingly sophisticated tenants

Landlords aren’t the only ones with access to large amounts of data. Tenants are increasingly switching to more intelligent business systems. Larger tenants that have desirable lease covenants use sophisticated lease analysis software. What’s more, they demand more transparency from landlords on the CAM cost allocations and calculations. Landlords that do not meet the requirements of these tenants will find a shrinking pool of tenants willing to do business with them. Landlords using commercial real estate investment software have the clear advantage.

Existing systems and sunk costs

You’ve made it this far in the reading and understand the case for better systems. But you purchased software licences for other systems. Although you haven’t been able to meet all of the objectives you had hoped for initially, you haven’t fully amortized those costs. Perhaps you should wait until those costs are used up?

The costs for anything unrecoverable are known as sunk costs. It is a fallacy to allow those costs to influence new decisions. They cannot have any impact on the future because the spent funds will not change now or later. Draw a line under them and start fresh in your decision process. All that matters now and going forward is whether a new system will have a positive outcome on the business or not.

The fears (you’re not the only one who has them!)

How much will it cost? Purchase cost and ongoing licencing fees

The initial cost of enterprise-level systems is a shock to many just starting in the quest for better business workflow. Financial cost considerations often overshadow the financial benefits so much that fear petrifies the buyer, or they turn to software that costs almost nothing upfront.

Software system costs vary greatly. Why does some software hardly cost anything, and others charge so much? The difference is in the capability to save or even make money through efficiency and sophistication. The case for business software is financial on one side offset by the significant ROI that purpose-built industry solutions for commercial property management can achieve.

The cost of change - initial software cost versus annual cost savings due to efficiency gains.

How do you know what you can achieve? For one thing, book a demo of the commercial real estate investment software. Indeed, do more than one demo and focus on each group of users to see the workflows and interaction between departments and management levels. Have your decision team see and understand how the system works for your specific case.

How hard is it to set up? Implementation, training and deployment costs

The fear here is that setup will require a serious time commitment from the existing staff who still have to use legacy systems while doing the setup work. Where will the extra hours come from? Will there be overtime wages? When can we schedule all the extra work? How much resistance will there be?

Resistance to change

Change across an entire organization is always difficult. While helpful implementation strategies such as these are useful to get employees on board, CRESSblue recommends getting people involved even sooner. In this way, change is a response to their feedback directly and enables a more fluid process. Furthermore, the staff sees management implementing change to suit the needs of its staff, rather than forcing change.

Implementation of change

Implementation, training and deployment are typically lumped together as setup. There is a push to market software products that require little or no setup. However, to achieve exceptional levels of automation, the business system needs to understand your business structure and its data relationships.

Once you have created a shortlist of workable systems, what will it take to deploy the solution? SaaS software systems have significant advantages over legacy boxed software. The provider does the deployment. You are not required to supply any dedicated, onsite hardware. Typically, SaaS solutions completely bypass the old-style software installation process and provide instant, encrypted access using your Internet browser.

Look for after-sales training options. Is personal training available, or are you left to dig through a user-created knowledge base? Getting adequate training is important for several reasons. First, training reduces user frustration and gets early buy-in from the staff. Second, it allows for an earlier realization of newfound workflow efficiencies. Third, those who launch into sophisticated systems without training often pull together a workflow that works, but that doesn’t fully utilize the most efficient workflows available.

Look for a company as committed to your success using their product as they are in selling it to you. Insufficient or ineffective training can cripple the launch of a new software system through user frustration. Merely purchasing a sophisticated system in no way determines its effective deployment and use.

How long will it take? Slow realization of initial goals

What if the system we try doesn’t work out for us? What if it costs a small fortune, takes a lot of effort to set up and then doesn’t meet our expectations?

Take a serious look at using professional setup and training services. While doing all the setup internally can be beneficial for training and familiarity with the new system, manually inputting historical data can be very tedious. See if software scripts can be provided to import much of the historical data into the new system. Of course, this assumes you have enough good quality data available in a useful format.

In summary, online software avoids all of the deployment headaches of traditional boxed software products. Taking advantage of training advances the implementation curve significantly. Together, these factors lead to more effective use of the system and earlier realization of returns on the technology investment.

How long do I have to sign up for? Commitment liability

Commitment isn’t really the issue here. No one worries about commitment when they like where they are. Asking about commitment is actually looking for an escape mechanism in case you made a serious mistake.

The question then becomes “How long will it take to realize if I made a mistake?” The uncertainty is the highest at contract initialization and decreases inversely with software familiarity. Make a definitive commitment to fully implement and deploy the software. Subsequently, within a few months, you will know whether it will work out. Look for a 3-month money-back guarantee in your contract.

Will this work with my other software? Integration problems

This is more or less important based on two questions. One, how many other software packages do you use? Two, how much will the new system replace older systems? Other factors include reporting to or integrating with external systems used by others, such as financial reporting tools.

Newer software systems are typically built with an integration layer that enables rapid and relatively painless programming to connect systems. Ask what other systems have already been integrated and get quotes on the integrations you require.

Is change really necessary? Uncertainty

Facing uncertainty in business often feels worse than sticking with the processes you know. This inertia can be useful as a hedge against too rapid change and gives stability to the company. However, too much inertia and the company will stagnate and fall behind nimbler competitors.

Inefficient responses, improper reporting documents and poor accounting records are evidence of stagnation. Small landlords are not impervious to this measure. Being small and self-contained does not insulate you from the competitive influences of growing tenant expectations. Businesses must invest in themselves or get left behind.

What if I look like I don’t know what I’m doing? Image and reputation

This one is a personal issue. An outside expert is going to look at my business? What if I have been doing things wrong? Won’t that make me look inadequate or incompetent?

First of all, taking steps to improve is the smartest thing a person can do. Bravo! No one has ever grown by hiding in ignorance. Step up, learn and be surprised by how quickly you can make improvements with modern business systems working for you. Secondly, if you were far behind, you have the most to gain. Moreover, you will realize your efficiencies faster than most. Get the tools to make the improvements you need to outflank the competition.

If you have progressed this far in business and life, you undoubtedly have what it takes to master enterprise business systems. They exist for people like you, in your situation. Software solutions have advanced tremendously. CRESSblue is an example of a very specialized system that brings something brand new to the table. You aren’t unique in your need for better software solutions. Knowing what needs to be done and not doing it is a fool’s path. Seeing room for improvement and advancing toward growth is the behaviour of the savvy and successful. You have what it takes to be successful. A big part of that is a hunger for continuous improvement and competitive advantage.

Addressing the fears (the solution is right here!)

Briefly, here are the main steps that alleviate the concerns of moving forward with new commercial real estate investment software.

Get informed

Research and discovery diminish change-induced fear. Utilize the sales team resources for your benefit. Get more details, get more demos. It’s their job to educate you on the possibilities and capabilities of their solution, so inquire to your satisfaction.

Demo and test

One standard demo will demonstrate the general use of any system. However, unique situations and process exceptions can break the workflow for the user. After the first demo, ask the other future system users to weigh in with their feedback. Schedule additional demos to see the functionality and workflows and how they address the atypical situations.

Mitigate the impact of change

Since early adoption of the new system is critical to its successful implementation, use the provided training resources. Get everyone using it effectively as quickly as possible. Concurrently, have the system provider run data import scripts as soon as possible. This step in effect informs the system on your business data relationships.

Avoid new risks

Have the system provider make the necessary software integrations for you. Avoid using workaround solutions as they destroy the efficiency you hoped to achieve. Awkward workarounds also lower user confidence in the new system.

Utilize newfound efficiencies quickly

Rapid deployment means reaching efficiency milestones sooner, and that means greater profitability. Minimize the initial hump as much as possible, and then cross it as soon as possible. With this in mind, fully commit to making the commercial property management system fully operational within the first three months.

The cost of not leaping

If you are looking for better property management software, there is obviously room for systems improvement. Delaying or declining the move to the right commercial real estate investment software can cost your company in many ways. Here are the top five risks faced by a commercial property management firm using outdated systems:

1. Lost revenue

Slippage is a significant source of direct income loss. Improper CAM calculations and missing expense recoveries immediately impact the bottom line. In reality, remedying slippage can, by itself, cover the cost of the entire software system and associated setup costs in the first year alone.

2. Disorganization

Lost documents, disjointed leadership activities and inattentive business management are symptoms of ineffective business systems. Dedicated, purpose-built enterprise business systems allow you to “get your stuff together” and keep it that way. So, replace “What the heck am I doing?” with “Check this out!”

3. No progress

Business systems have changed significantly in even just the last few years. If you are still using spreadsheets and individual independent employees, untapped efficiency gains exist. Improvements in workflows are one of the main reasons for using professional software.

4. Operating on assumptions

It is a point often overlooked, but if you do not have aggregated business information readily available, critical decisions stand on loose foundations. Basing big decisions on isolated data points and assumptions of past performance based on memory is risky. Get a complete picture of each property’s performance covering all aspects from asset purchase to capital expenditures to operational revenues, recoveries and losses.

5. No integration with partners

As a small business, you likely don’t have inhouse professional services. So then, what connects your outside legal, accounting, insurance, leasing and contracted maintenance services? You do. You hand responsibility from one profession to another. Your broker gets an offer to lease, and you give it to your lawyer for a lease agreement. If you are a careful landlord, you get your insurance broker to review the new tenant’s risks. Your bookkeeper does the daily accounting, and you hand the books off to the accountant to file your annual returns. At the centre of it all is you. It’s your responsibility to integrate all the information from everyone into a business plan and to act. Why deprive yourself of business tools you need to organize, cooperate and understand?

Purposeful striding

Given these points, it’s clear that there is a strong case for moving forward with modern business software, and that there are logical steps to resolving the associated fears.

Now we get to the heart of the matter. Insomuch as something needs to be done, and done quickly, the best advice is: Don’t leap at all.

That’s right. Don’t rush into anything. Plan. Prepare. Execute. It isn’t a question of leaping off a cliff and hoping you make it. A smart executive strides purposefully toward intended goals.

Plan. Prepare. Execute. Commit to the best SaaS for your business.

The timing is now

Change inevitably happens in the business environment, regardless of personal stagnation. Consequently, this will either force personal change or force you out of the industry. The only thing worth feeling embarrassment over is awareness of what needs to be done while doing nothing about it. To let critical opportunities for continuous improvement and competitive advantage slip you by. You know what to do. You know how to start. More importantly, you know you can do this.


Disclaimer

This article is for informational purposes only and is not intended as professional advice; please consult a competent professional for advice specific to you. This blog is written to stimulate thinking on concepts related to commercial leasing. Please join the discussion with your experiences.


Martin Sommer, CEO, CRESS Inc.

Follow me on LinkedIn

Martin is a founder and the CEO of CRESS Inc., a Canadian SaaS company that automates lease administration and asset management. Martin also manages Karanda Properties Limited industrial portfolio as Director of Operations in all areas of commercial property management, including new development, asset management, capital expenditures, operations, leasing and lease administration of the industrial portfolio. Martin writes about property management workflow and issues. Book Martin to speak at your industry event.

Old system and ad hoc workflow in online business systems. What is the competitive cost?

The Costs of Not Moving to Modern Online Business Systems

Online business systems in the financial sector

Modern online business systems for commercial property managers? There’s a common expression in commercial property management that real estate runs on spreadsheets. It’s true. There are four major categories in the financial investment sector:

  • Banks
  • Investment funds
  • Insurance companies
  • Real estate

Of the four, real estate lags the others in available software and systems adoption by up to 15 years. The others have invested heavily in current online business systems. As a result, they have reaped the rewards in the form of higher returns and faster response to market changes.

Let’s take a look at the ways this lack of digital sophistication has impacted the real estate management companies. Most importantly, let’s get clear on how smart executives can lead the way out of the digital dark ages.

The cost of time

The most readily observed, and perhaps resignedly accepted, is the length of time it takes to use patchwork software systems. To illustrate, imagine a business that allows the use of generalized software such as spreadsheets and word processors to be the core of its business systems. It’s easy to perceive that it uses its people to repeatedly design and maintain micro solutions to digital problems on an ad hoc basis. Obviously, this ad hoc process results in insanely inefficient use of time. Imagine trying to run a production line of cars where one person does the majority of the build on their own with hand tools and personally built fabrication jigs. Sure, a limited-run, high-end car might return value from a process like that. However, there isn’t a single real estate leader that would brag about hand-crafted, individually-constructed property reports based on the skill of individual property managers.

Workflow efficiency is a competitive advantage

There is an excellent opportunity to increase the efficiency in the preparation of reports, budgets, approvals and document travel through the use of software specific to the workflow of each sector of the real estate industry. Labour costs are one of the largest overhead costs in property management. Clearly, it’s time to move on to digital workflows that efficiently promote consistently better results while reducing individual effort.

Workflow efficiency is a competitive advantage.
DILBERT © Scott Adams. Used By permission of ANDREWS MCMEEL SYNDICATION. All rights reserved.

One of the topics that come up is that of employee job security. “If I switch to an integrated system, I’ll have to lay off half the people.” That is seemingly a valid sentiment. Who wants to be responsible for half the staff losing their jobs to software?

However, that thinking has a critical flaw, and it is this: inefficiency does not secure jobs. All that does is make the company worse than the competition, and the whole company will eventually go under or be taken over. No other company is going to hang around with you in the digital dark ages for the sake of your employees. The choice isn’t between all or some; the option is between some or none of them.

Online business systems empower your staff to do more

On the contrary, if you want to save jobs, it is done by being the most efficient firm in the industry. Therefore, switching to innovative online business systems is one way to achieve time efficiency. It results in higher margins overall. Plus, it generates higher revenue per person. That is the only way to secure employment long term, and it also creates more valuable employees. Secure jobs with better pay. Use that extra employee capacity to take more market share.

Data management and document control

The typical scenario with small and even mid-size property management firms is every-person-for-themselves when it comes to maintaining a set of documents for each property and each position. Data resides on the computer hard drives of the building manager, the property manager, the portfolio manager, the regional manager and so on. In fact, it’s unlikely that a complete set of data for each property even exists in this fragmented storage system. After all, no one person has the ability to see the entirety of it.

Seeing the entire picture

There tends to be a serious lack of consistency and transparency when it comes to fragmented and siloed data filing systems. It leads to reporting with very little supporting data included. Numbers in isolation lose their credibility and reliability as there is no way to verify their accuracy or the completeness of the calculations. Warren Buffett is famously known for his detailed and in-depth research on his planned stock purchases, right down to the notes in the margins in the raw data. How can someone effectively manage their investment responsibilities if they cannot get a complete picture of their own business?

Instant access to comprehensive information

Centralized data storage is critical for managing property data. It contributes to the effective movement of information, the completeness of the records and the transition of people and properties. It is the only way to effectively scale a company and still know – and know quickly – what is going on at all levels and in all areas. KPI’s are just that: key performance indicators. They don’t give details on why things are changing. Fast responses head off developing problems, and that requires readily available information right through to the lower levels. Periodic individual compilations of data aren’t enough. Relying on an annual financial report from an outside accountant to find out if the firm made money that year is ineffective for strategic business planning. It’s too late to correct the course for that year, and possibly for the next year also.

Centralized data enables deeper CRE insights consistency and transparency.

Specialized online business systems give you the ultimate control over your data.

Security

Data security has several aspects to it. First and foremost, where are the files? Are they travelling around on personal phones and laptops? If so, the risk of total loss is relatively high due to device theft, failure of the storage media, accidental deletion, file corruption and malicious software attacks. Using office desktop computers can limit the device theft aspect. However, that’s not enough. Often, the other risk factors are not addressed in any significant way until a data loss or breach has already occurred, especially in smaller private companies.

Centralized data storage on a local network was commonplace a decade ago. In any event, times have indeed changed. Now it is considered an ineffective and costly way to address access, security and backup concerns. There is no guarantee that users are keeping files on the network as opposed to their local drives. Moreover, individual machines must be set to back up the contents of their drives to the servers. IT support is limited to external contracted services or internal staff. Purchased equipment asset lifecycles have more influence on upgrades than the changing security environment does, resulting in less than stellar data security.

The best business systems currently use online software hosted on large server farms. This economy of scale leads to five critical improvements.

The best property management systems use modern, secure technology.

First

The actual hardware is now in a competitive environment: Amazon, IBM and Microsoft all provide hosting services. The primary competitive edge is hardware performance vs. cost. Everything is best-of-class. Additionally, users can scale immediately based on need, not whether cash or financing is available to make computer equipment purchases.

Second

The “big 3” all provide automatic backups and data storage redundancy.

Third

There is real-time monitoring of the system health, intrusion detection and security by specialist professionals and enterprise-level software systems.

Fourth

Hosted software systems automatically centralize all data storage by default. There is no need to control individual devices to make sure files are intact and backed up.

Fifth

Access to files and sensitive information is also controlled centrally via the software system user credentials.

The right online business system reduces the non-stop burden on the internal IT department. Management of hardware performance, security and backups are professionally managed with best-of-class services and technology.

Agility

The agility to structure deals in new ways to meet a rapidly evolving real estate landscape is vital for business competitiveness. Markedly, it is an often overlooked aspect of what specialized, online business systems can offer. Previously we talked about landlord-tenant loans and how they can provide compelling advantages over traditional lease financing methods. The days of buying an accounting system and adding property management modules to it are fortunately heading into the long-awaited sunset. User experience and intuitive workflows are crucial now, making the software conform to the user rather than the user to the system.

Connectivity is the holy grail of data systems. Users can record and access relevant data from anywhere with their workflow. Plus, it is automatically accessible to others who also need it. Information becomes consistent and coherent, no longer dependent on a single individual’s performance and skill.

Opportunity costs drop to their lowest possible value with agile systems as such business systems consistently avail of the optimum response. Say goodbye to lost opportunities due to systems that cannot record the necessary information. No more missed gain waiting for software releases to catch up to what is already possible in real life. Best practices can become the default standard for a business that uses a software system optimized for their industry.

Monetary considerations

For commercial real estate management, the big one here is slippage. The inability of user-created spreadsheets to correctly handle complex cost recovery calculations isn’t the fault of the spreadsheet. It’s often simply too complicated and too time-consuming to create the correct formulas to do the math accurately. You can read more on the complexities of these and CAM calculations here. The resulting slippage is either accepted as an alternative to spending time doing the math, or as lost audit challenges from tenant lease analysts.

Other direct losses occur from insufficient management data to see developing trends and make timely decisions. There is an incorrect assumption that past data is sufficient for future performance predictions.

As an example, there was a period where the bitumen supply for roofing and asphalt paving was of low quality when prices for oil sands products rose sharply in the late 1980s. The effects were not immediately known. However, BUR (Built-Up Roofing) systems and parking lots started incurring significant maintenance issues and costs as early as 13 years into the expected 25+ year life cycle. Roof systems and parking lot replacements are the two most capital intensive prospects most properties ever face, and as a result, these costs were unexpectedly early. Aggregate information gathered from properties with this type and vintage of roofs and parking lots could have alerted property management firms of this issue. The managers could then strategically prepare to either dispose of those assets or plan for the capital expenditures.

Professionalism

One of the most significant benefits of adopting advanced business software systems is the substantial increase in professionalism. Due to the consistency and detail that is readily available in such systems, there is a marked increase in reporting speed, authority and accuracy. Internal audit capabilities can prove that accounting documents comply with the lease documents terms. Consequently, the company can be confidently transparent in its dealings with tenants.

The move to current online business systems

Staying in the digital dark ages will put real estate management companies out of business. Real estate is big business and forms a significant part of the financial investment portfolio. All of the other three sectors of banking, investment fund management and insurance have surged ahead with sophisticated software systems. Inevitably, the real estate management sector will also experience the same changes to software systems. In fact, there is much evidence that the change is already occurring. There is a rise in the number of available software systems for the residential, multi-tenant management companies. Commercial net lease real estate management systems have been much more challenging to develop. Fortunately, newer entries, such as CRESSblue, are now forcing change into the sector.


Disclaimer

This article is for informational purposes only and is not intended as professional advice; please consult a competent professional for advice specific to you. This blog is written to stimulate thinking on concepts related to commercial leasing. Please join the discussion with your experiences.


Martin Sommer, CEO, CRESS Inc.

Follow me on LinkedIn

Martin is a founder and the CEO of CRESS Inc., a Canadian SaaS company that automates lease administration and asset management. Martin also manages Karanda Properties Limited industrial portfolio as Director of Operations in all areas of commercial property management, including new development, asset management, capital expenditures, operations, leasing and lease administration of the industrial portfolio. Martin writes about property management workflow and issues. Book Martin to speak at your industry event.

Choosing between entry-level and enterprise-level business systems.

Business Systems: Entry-Level or Enterprise-Level?

So, you’re looking to improve your business systems and discovered there are more commercial property management software options than you thought possible. How does a smart executive choose?

It’s essential to weigh price against capability, workflow and productivity gains. As a result, the most financially efficient system will become obvious. Let’s investigate this in detail.

The common offer

There’s a definite trend towards availability of entry-level software packages for property management. It seems every day another introduction flyer blows into the office announcing the latest and greatest new solution in real estate software. Almost universally, these are the key features:

  • Start using right away
  • No user fees
  • No long-term contracts
  • Low monthly fee

If it didn’t mention property management software, one might be inclined to think it was promoting a mobile phone plan. Does commercial property management software actually have the same evaluation criteria as a cell phone plan?

Let’s get going!

Who wants to wait for setup and training? We want to get productivity up right away!

How initial setup affects business systems

The initial setup allows for a significant reduction in workflows due to the automation of tasks that would otherwise be manual. For example, checking invoices against lease document terms can be automated on integrated systems. Similarly, cost allocations can be performed automatically, eliminating the need for time-consuming spreadsheets. Additionally, the reconciliation process can be automated, ending the need for manual reconciliations.

Setup doesn’t have to be difficult or complicated. However, the data needs to be input to allow the system to create the necessary logical structures between the property, lease and financial data sets. These connections allow software automation to take over tedious and time-consuming tasks. Without having the necessary structure in the software, it is impossible to realize significant automation. The system simply doesn’t have enough information to know how to process data for each specific case.

In many cases, large data sets can be set up in the system by using custom import scripts. This is possible when a reliable and accurate data source exists. The scripts map the supplied data into the correct fields in the new database. This setup can save significant time on tedious tasks.

Every advanced skillset requires training and practice. Athletes constantly train and use coaches to teach them and provide feedback. Being good at something requires dedicated education and learning.

Realistic expectations

Facts don’t support the expectation that employee productivity can increase without new systems training. If the system is so simplistic in its capabilities that training isn’t recommended, then there isn’t much hope for increased productivity ever. Alternatively, the system may be sophisticated but without training its users will be continually confused and inefficient in its use.

Training programs teach four important things. Firstly, training programs teach best practices. Secondly, they highlight new and faster workflows. Thirdly, they reveal crucial security procedures. Finally, training programs teach how to use the software most efficiently. This time allows your staff the opportunity to become familiar with the systems and to implement company policies. Providing software training indicates to employees that the company is committed to the system and their use of it.

Providing little or no user training is to accept mediocrity from the outset.

No user fees. Woohoo!

Wait, there are no user roles either?

Business applications need defined user roles. At the very least, the bookkeeping and payment authorization responsibilities need to be separated unless it is a sole proprietorship. Generally, a property management company will need, as a minimum, role segregation in leasing, financial (accounting), asset management (owners) and building maintenance.

Company hierarchy needs to be translated into the software systems and be evident in the user workflows. Approvals should be isolated to those given the authority to make those decisions by the company. The scope of work accessible to a role should be based on the natural flow of information in real life. It’s unlikely your accounts payable person knows that the work done by the maintenance person isn’t recoverable as additional rent for one tenant because of a lease exclusion. If your software isn’t sophisticated enough to do the allocations for you by checking the expense accounts against the lease terms, the lack of capabilities and defined user roles will severely impact the efficiency of your staff. It will drive the workflow outside of the software system.

User roles promote orderly and controllable business operations and decision making. You wouldn’t buy a car with the vehicle controls in the middle for everyone to use at will. Why would you consider critical business systems set up that way?

Defined user roles in business systems are critical for success. They come with scaling fees based on the complexity of the user functions attributed to them. You pay for what you use. We’ll look at fees in more detail below.

No long term contracts?

Ahh yes, the maximum flexibility.

Remember what was said about setup and training? A lack of commitment to a software system doesn’t allow for the realization of any efficiencies either. From the start, effective business systems require setup for automation. Additionally, employees need training to learn effective workflows.

Choosing a property management software system specialized for commercial applications is an important decision. Indeed, it isn’t something you want to do often. It should be a decision that is fully supported by the software supplier. A longer-term contract provides security for your business. Specifically, it assures that your initial investments will have time to pay off. Moreover, a longer-term contract indicates that the software company is committed to supporting and enhancing the system for at least the length of your contract. In contrast, a no-commitment contract lacks these assurances.

Business systems with low monthly fees

Surely those are good!

Fixating on the low fees encourages a “price only” evaluation. Frankly, that’s a ridiculous business proposal. If you want to determine value, you need to look at financial efficiency, not just financial cost. What are you getting for your money?

This isn’t the point where you ask for the features sheet.

What you need to see is how the software workflow and abilities improve employee productivity. Are leasehold improvements automatically capitalized to the correct properties? Are the annual depreciation amounts automatically calculated for the accountants? Can an annual additional rent reconciliation be automated without the use of spreadsheets? Is it ready for review in less than two minutes?

We’ve all seen a lease setup done in a demo. Have them show you how the system logic uses that to calculate the additional rent charges and exclusions based on lease periods and negotiated lease terms. Ask for role-specific examples to see the impact on workflows. How is a reconciliation affected by an area audit challenge in a multi-tenant building? Is it an accounting disaster, or merely two minutes of a supervisor’s time before you have new reports for all the tenants and managers? Go way beyond colourful screenshots and best-case scenarios.

The first software demo won’t be able to cover more than the general overview of the system. You will want to have additional demos on specific roles and workflows to assess capabilities and actual outcomes. To that end, you should get a deeper understanding of how you can vitalize your teams on the whole. In like manner, you should be able to visualize better ways to get work done. All in all, you need to see what you can actually accomplish. Don’t settle for anything less than the “that’s exactly right!” feeling.

Realizing efficiency in productivity gains

Can efficiencies be realized in increasing employee output? If you can give your employees additional workload, then the answer is yes. For example, with the right business systems, employees can manage additional properties within the same time frame. Overall, it is reasonable to expect entry-level software to increase employee efficiency by 2-5%. How will you utilize the newfound time and increased efficiency for productivity gains?

The goal isn’t to drive employees harder. Firstly, the goal includes significantly improving the bottom line while reducing tedious work and time required. Secondly, it is to get more accurate and complete accounting. Thirdly, it is to have a happier team. And fourthly, it is to operate a more professional company.

Software systems need to be evaluated based on the impact on actual user roles. Moreover, any found efficiencies need to translate into markedly and measurable increases in productivity. Only then can you make a value assessment linking price to productivity.

Checking the math

Let’s run a quick sample calculation.

In this illustration, we have assumed an average employee salary of $50,000 per year and 50 weeks working, giving a salary amount of $1,000 per week. The results are scalable to whatever pay rate you want to use.

Entry-level software

Entry-level commercial property management software is typically $1 per unit with a minimum of $200 per month. Assuming that this software gives a realized increase in productivity of 5%, we get the following:

ENTRY-LEVEL SOFTWARE PER PERSON PER 4 PEOPLE
Annual Cost  $2,400  $2,400
Monthly Cost  $200  $200
Weekly  $48  $48
Time Savings @5%  2.5 weeks  10 weeks
Savings  $2,500  $10,000
Savings Less Cost  $100  $7,600

We have assumed that there is no limit on the number of users allowed on the system at any one time and that fixed fees apply regardless of the number of users.

Enterprise-level software

Enterprise-level software can conservatively increase productivity by 15% in realized output gains. We have assumed an average combined cost per user of $2,400.

ENTERPRISE-LEVEL SOFTWARE PER PERSON PER 4 PEOPLE
Annual Cost  $2,400  $9,600
Monthly Cost  $200  $800
Weekly  $48  $192
Time Savings @15% 7.5 weeks 30 weeks
Savings  $7,500  $30,000
Savings Less Cost  $5,100  $20,400

Comparisons

Enterprise-level software is the clear winner from a business standpoint. Even if you factor in personnel time for the first-year setup into an enterprise-level solution, you still come out ahead when the size of your company dictates you need to move beyond generic accounting software and spreadsheets. The long-term savings are too significant to ignore.

Given these points, it’s not that hard to decide. For example, if you are delivering products, do you want fancy running shoes or a delivery truck? Running shoes are easy, cheap and require little commitment. However, they offer little change in productivity. A truck requires commitment in time, money and operating costs. However, the boost in productivity puts you in another business class entirely.

Investing in a delivery truck serves to break through current limitations. The running shoes can’t come close. Likewise, enterprise-level software supports an optimal workflow and generates maximum productivity. Not surprisingly, marked business growth requires the implementation of correspondingly large business systems.

Decision time!

As can be seen, enterprise-level software systems unquestionably provide the most direct path to commercial success.

The investment in new business systems needs to result in measurable increases in productivity

To that end, here are several key thinking points when evaluating new software systems:

  • What are the current roles in my business structure?
  • Why are the roles defined in those ways?
  • Is the workflow based on the natural flow of information and decision authority, or are they based on the current system process limitations?
  • What are people spending their time on?
  • Where can we save the most time?
  • How much control do we have over the systems we use?
  • Does our work match the processes we use, or does the system define how we do our work?

What defines how we do our work?

Imagine the possibilities if:

  • Your business systems were smart enough to use logic to make repeatable decisions instead of people repeating decisions.
  • Computers did all your math instead of people making and using spreadsheets.
  • Your people did work that let them be thinking humans, and machine systems flawlessly performed the tedious and mundane.
  • Roles supported your people, their abilities, their authority and natural lines of communication – rather than system limitations.
  • Workflows were complete within the software solution.

CRESSblue is designed to require no more interaction for regular tasks than a person would need. So, if a person can describe a complex invoice allocation to another person in 90 seconds, the software can do the same. Or, quicker. As a matter of fact, CRESSblue will also do all the calculations based on internal logic and give you the results, without using employee time. What’s more, you will receive personal support in the initial setup, implementation and training to ensure your success.

We are ready to make a case for the financial efficiency of our commercial property management software system. Moreover, we are happy to demonstrate the clear difference CRESSblue can make for you.


Disclaimer

This article is for informational purposes only and is not intended as professional advice; please consult a competent professional for advice specific to you. This blog is written to stimulate thinking on concepts related to commercial leasing. Please join the discussion with your experiences.


Martin Sommer, CEO, CRESS Inc.

Follow me on LinkedIn

Martin is a founder and the CEO of CRESS Inc., a Canadian SaaS company that automates lease administration and asset management. Martin also manages Karanda Properties Limited industrial portfolio as Director of Operations in all areas of commercial property management, including new development, asset management, capital expenditures, operations, leasing and lease administration of the industrial portfolio. Martin writes about property management workflow and issues. Book Martin to speak at your industry event.

Commercial net leasing.

An Introduction to Commercial Net Leasing & Commercial Lease Software

Why should I be concerned with commercial lease software when it comes to commercial net leasing?

Commercial lease software processes the complexities of commercial net leasing most efficiently and accurately. In this introduction to commercial net leasing, consider the challenges faced by landlords and how property management software makes them easier to overcome.

What is commercial net leasing?

Commercial leases, also known as commercial net leases, are agreements to rent space for business purposes where the rent is net of the operating costs to own and manage the building. There are different types of commercial facilities, with the four broad classifications being office, retail, warehouse and industrial. Often, components of several types are combined in one space, such as industrial with some office and warehouse components. The leases are uniquely tailored to suit the main business use of the tenant in the premises.

Four broad classifications of commercial properties.
Common categories of commercial leasing include office, retail, warehouse and industrial.

What makes commercial net leasing different from renting?

Typically, those new to commercial net leasing are mainly familiar with the concept of residential renting, where tenants pay one monthly rate and are only responsible for separately metered utilities and damages to their rented space. Residential tenants also have an abundance of protections and legal rights.

Commercial lease agreements are nearly the opposite, and this is often a shock to someone who has not been exposed to a commercial net lease. Below are a few of the areas in which commercial leases differ significantly from residential renting.

Legal protections and rights in a commercial lease

Commercial leasing is governed by property law and contract law. A commercial lease agreement is a blend of both of those aspects of law, and gives rights to both the property owner (or landlord) and the tenant renting space (the premises). Certain rights and responsibilities fall under property law and others are under contract law—a complicated distinction which varies by jurisdiction and case law. Protections for the tenant against eviction in the winter, utility disconnects and rent increases do not exist in commercial lease situations like they do for residential rental properties. In addition, rights can be given up in commercial lease agreements that might not be permitted in the case of a residential rental agreement.

What is a net lease?

A net lease, or triple net lease, includes terms describing amounts that will be charged in addition to the rent. The rent shown on the face of the lease agreement is the base (basic or minimum) rent that will be charged. In addition to this, there will be tax, maintenance and insurance charges, collectively called TMI. The maintenance portion may also be called common area maintenance (CAM). There is no real difference between the meaning of net or triple net; both mean the lease has additional charges to the base rent amount that will be described more fully in the lease agreement. These additional charges can total as much as or more than the base rent amounts.

Basic cost components of a net lease.
A commercial lease can include base rent, plus tax, common area maintenance and insurance charges.

The TMI may be classed as operating costs or as additional rent; there’s a slight distinction in those terms and the remedies that can be used to cure a default, with the operating cost being part of contract law and additional rent falling under property law. These vary by jurisdiction, so it’s recommended to consult with a lawyer on those issues and whether it is worth negotiating one way or the other.

In rare cases, a commercial lease may be a gross lease where all charges are wrapped up into one rent payment (as in a residential rental agreement). This is more likely to happen when premises are small and the lease term is short, which can cause difficulty making additional rent calculations. It can also occur when the landlord lacks sophisticated commercial lease software that efficiently performs the required calculations.

What does proportionate share mean?

Commercial sites often have multiple tenants at the same time. In multi-tenant properties, the additional rent is usually allocated to the tenants on a proportionate share based on the rental area of the premises divided by the total rentable area of the building or site.

Commercial lease software takes care of the complexities of expense allocation.
Proportionate share means that tenants pay for actual usage or share of expenses, according to the lease terms.

The expense allocation process can be quite complex when there are multiple buildings on a site, or if not all tenants have access to or use the common areas. For example, a ground floor tenant may not want to be charged for escalator maintenance, or a mall tenant for the common loading docks servicing the stores in another wing of the shopping centre. The operating costs must be properly allocated to those tenants that are in the pool of users of the common areas and services.

In the case of vacancies, a charge called a gross up factor is applied to the shared common utilities that aren’t individually metered, such as central heating and cooling, water usage, cleaning and lighting. Vacant spaces typically have a lower heating/cooling demand (around 30% less) and don’t use water or produce wastewater. The amount of a utility invoice that is based on usage is then allocated to those tenants that are using them for the period covered by the invoice. The fixed charges are still allocated to the entire area connected to the services and that fixed portion of the vacancy cost is borne by the landlord.

Rentable areas of the leased premises may also be grossed up with a proportionate share of the common areas. Base rent will be charged on the grossed up rentable area and not just the rentable area of the premises. This is further complicated when the total rentable area changes on the site or building due to renovations, additions, or temporary construction shutdowns.

Some tenants with high bargaining power can negotiate fixed additional rent rates, or different types of caps on the annual increases in additional rent that will be permitted.

CRESSblue commercial lease software is available to landlords to do proportionate share and date calculations automatically, and can report on the allocations on a per invoice and aggregate annual basis for tenant audits.

Why all the clauses about operating costs?

Commercial leases use similar wording about what is an operating expense (Op Ex) and what is a capital expense (Cap Ex), but the practical application is quite different. There are no official definitions, and so whatever is in your lease agreement regarding the additional rent will be applicable to your situation.

Generally speaking, operating expenses are those incurred in the maintenance and operation of the building to keep it in its regular state of repair and efficiency. Capital expenses are those that make improvements to the functional ability of the property, significantly extend the life of the asset, or alter its use.

Operating expenses are recovered by the landlord from the tenant(s) through the additional rent charges. Only those expenses that actually occurred are to be charged to the tenant, so this category does not include reserve funds.

Capital expenses are to be capitalized in the landlord’s books and are depreciated. Neither the capitalized cost nor the depreciation is classified as operating costs. That doesn’t mean that capital expenses cannot be included for recovery from a tenant in a lease agreement; it just means that they should not be included in the operating expenses.

The real difficulty for both tenants and landlords is the gray area between Op Ex and Cap Ex. For example, how much of a roof repair constitutes a partial replacement? If 10% of the replacement cost is used as a guideline, can 1/20th of the roof membrane with a lifespan of 20 years be replaced each year as a “preventative maintenance Op Ex”? A landlord could avoid having a major Cap Ex entirely using this approach. Would this method be acceptable if the roof was already leaking? Maybe the tenants would appreciate never having a roof that leaks due to its old age.

One approach or the other isn’t necessarily right or wrong (unless the terms of the lease already dictate otherwise). Landlords will be better off by being transparent in their decision-making process in the terms of the lease rather than relying on ambiguity and a lack of reporting details. Most of the time this isn’t deliberate on the part of landlords; it is a lack of affordable sophisticated software that would allow them to better handle the complex calculations and record keeping. Newer solutions such as CRESSblue commercial lease software have significant capabilities in automating additional rent accounting.

Percentage rents and CPI increases

Leasing space for retail purposes often brings in a type of rent called percentage rent. In retail space like a shopping mall or plaza, the number of visitors to the centre is an important driver in the sales for the tenants. To ensure that the overall performance of the site is reflected in the rents charged to the tenants, there is a minimum rent specified in the lease agreement, and above the break point a certain percentage of the tenant’s sales from the premises is paid to the landlord as rent. The list of tenant products included in the percentage rent categories, the levels of sales and corresponding percentages, and exclusions form a complex negotiation and record keeping challenge.

In highly competitive markets, base rents may also be indexed to the Consumer Price Index (CPI). This allows the landlord to be protected from inflation, and the tenant to know that the rents are adjusted based on an independent third-party. The index to be used, the adjustment periods and the location basis of the index should all be specified in the lease agreement. Wording should also be included in the lease in case the index specified is discontinued, revised or replaced.

Leasehold improvements

Leasehold improvements are at the expense of the tenant. The landlord may offer various incentives to assist either in the construction, payment or financing of the improvements. The landlord will reserve the right to approve the work planned and may also insist that its own contractors be used for portions of the project. This can be for the purposes of maintaining warranty coverages, collective bargaining agreements, or simply because the landlord wants to use contractors it has previously vetted. The landlord may charge fees for having the proposed work reviewed by its architects or engineers.

Once the work is done, the leasehold improvements become the property of the landlord (provided they are not in the nature of trade fixtures, which typically remain in the ownership and control of the tenant). The tenant will be responsible for insuring and maintaining its own leaseholds.

Insurance

The tenant is required to insure its own business, including general liability, as well as its leasehold improvements. The landlord’s insurance is normally secondary to the tenant’s insurance, and does not cover the tenant’s leasehold improvements even if the landlord assumes ownership of them upon completion. The landlord also doesn’t carry insurance for any of the contents in the premises, or for any business interruptions, however caused. It is important for a tenant to review its required coverages based on the terms of the lease, and also to ensure it is fully insured for its own needs.

Annual reconciliations

The additional rent is reconciled annually. A statement is sent out to all of the tenants for each property showing the expenses for the period, the tenant installment payments, and the shortfall or overpayment. The tenant may have certain rights in its lease to review the charges and calculations. There is typically a two year review period for either party to make an appeal or adjustments to the statement.

Why lease?

If commercial leasing is so complicated, why lease at all? Why would someone want to be a landlord or a tenant?

From the owner’s perspective, commercial property is expensive to build and to maintain. Commercial construction costs, property taxes and operating costs are higher than residential rates. It’s very costly to have vacant commercial space sit empty. Becoming a landlord and leasing the space to a tenant can significantly help with those carrying costs.

For a business owner, becoming a tenant can enable access to valuable space in a prime location without taking away from cashflow with a down payment. Having a landlord manage the building allows the tenant to focus on its business strengths without the distractions of building ownership and maintenance. It offers a more predictable way to operate a business, as well as flexibility to move and grow more rapidly.

It’s a business relationship

Lease negotiations are usually handled by commercial real estate brokers on both sides. Often, the actual tenant employees in the premises and the landlord’s property managers are not involved in the negotiation process at all.

It’s important for both sides to realize that commercial leasing is a symbiotic relationship. The landlord relies on the tenant paying rent and looking after the premises as a prudent owner would. Happy tenants stay, which reduces the broker commissions for the landlord, the incentives paid out on new leases and the vacancy rental losses. The tenant relies on the landlord to arrange for maintenance services, pay the taxes and operating bills on time, and to arrange and manage all the various contracts effectively and efficiently. If either party is deficient, the other one suffers as well. They might sit across the table, but both are on the same boat.

Commercial lease software supports good business

Clearly defined terms and expectations, effective communication and transparency are the keys to healthy landlord-tenant relationships. Efficient lease management and reporting is the basis of CRESSblue commercial lease management software.


Disclaimer

This article is for informational purposes only and is not intended as professional advice; please consult a competent professional for advice specific to you. This blog is written to stimulate thinking on concepts related to commercial leasing. Please join the discussion with your experiences.


Martin Sommer, CEO, CRESS Inc.

Follow me on LinkedIn

Martin is a founder and the CEO of CRESS Inc., a Canadian SaaS company that automates lease administration and asset management. Martin also manages Karanda Properties Limited industrial portfolio as Director of Operations in all areas of commercial property management, including new development, asset management, capital expenditures, operations, leasing and lease administration of the industrial portfolio. Martin writes about property management workflow and issues. Book Martin to speak at your industry event.