Keys to Effective Lease Abstraction Templates
What are the most important parts to include in your lease abstraction template?
What to extract? How to Extract? Why to Extract?
Your lease abstract template is the backbone of your abstraction project, simplifying the complexity of your lease documents and scaling to manage the volume of leases in your lease portfolio. You need to ensure that your abstraction template captures all the relevant information. While some core fields such as rent, options, key dates, etc., are needed irrespective of what industry you belong to, there may be fields that are important for your business or industry in particular. Apart from such fields, there may be certain, less common clauses in some leases that must be captured.
So, the first step to ensuring you are capturing the right data is
Being able to identify what data matters to you
Having a template that caters to your needs by capturing that information
You can do this by defining the lease abstraction template objectives clearly.
Defining the lease abstraction template objectives
Lease abstraction objectives can be broadly categorized into four categories.
This involves tracking and optimizing every aspect of the company’s portfolio of leased assets that will add value to the entire leased portfolio and can also make a huge impact on the outcome of the financial report. Examples include rent and other payment obligations, security deposit, tenant improvement allowance, etc.
This involves tracking critical lease dates and highlighting potential liabilities, which, if missed could result in serious financial implications to a company’s bottom line. For example, missing notice period, renewal options, last date of rent payment, etc., or, not understanding or accruing a potential lease liability and its obligations such as using the premises for the sale of goods or services not permitted in the lease.
Whenever there’s a change in regulatory requirements that impacts how your leases and the components therein are shown in the books of accounts, it will result in some changes in your lease abstracts. The most recent example is the FASB/IASB regulations that categorized the leases as operating leases, capital leases, leases with a right to purchase, etc., thus bringing about changes in the way they are accounted for, in effect, requiring the lease abstracts to be restructured to comply with them.
The COVID-19 pandemic brought to light the need to explore various clauses, which were otherwise probably not considered important to be included in lease abstracts. An example is when, during the peak of the pandemic a lot of tenants, especially in the retail industry, had to act swiftly to exercise the options in their leases that offered them some respite as their finances hit rock-bottom due to lockdowns and shelter-in-place restrictions brought on by the pandemic. Examples include exercising the Force Majeure clause that may allow the tenant to terminate the lease before the end of the term or allow for rent abatements or suspension in exigencies such as the pandemic.
For your lease abstracts to be accurate and truly serve their purpose, the template has to reflect all information that is relevant to you. This is where a lease abstraction partner with expertise, experience, in-depth knowledge, and perspective of the process can add value by streamlining your lease abstraction process and designing optimal lease abstraction templates.