Importance of Lease Abstraction
A lease summary is a detailed summary of the key business information in a commercial real estate lease. This lease roadmap allows a leasing administrator, leasing agent, property manager or maintenance manager to renew frequently referenced lease information without having to take the time to examine a lease leasing to find the necessary information. It also allows for aggregation of critical lease information, such as expiration and option notice dates, to better manage a portfolio of leases.
Commercial leases are often filled with long wordy paragraphs written in convoluted legal language and abstracts cut through all of that language and condense the lease down to its important information.
The content of a summary varies depending on the type of lease, but all leases contain the following main terms: (1) name of tenant, (2) name of owner, (3) term of lease, ( 4) number of square feet leased, (5) number of space, (6) base rent, (7) percentage of rent, and (8) list of documents that modify the terms of the lease.
Most of the time, an individual requires a lease summary not for their own understanding of the lease terms, but for financial purposes. When an individual seeks to purchase commercial property, they must perform what is called due diligence. Due diligence requires the potential buyer to inspect all aspects of the property, including the status of any leases associated with the property. Reviewing the lease summary rather than the lease itself makes due diligence much more cost and time efficient. A lease summary will provide the essential details of a transaction long after the negotiating parties forget the terms. Therefore, it is a powerful tool to help manage and audit a lease throughout its term.
The most critical information that must be included is the financial lease information. The obvious reasons are because the financial components of every lease drive every commercial real estate transaction. Although most, if not all, of the financial information should be included in the lease statement, the inclusion of non-financial information offers more discretion to the abstraction than financial discretion to the extractor than the financial information. The inclusion of these provisions is often dictated by what a party considers relevant in relation to the specific property or lessee in question.
The lease summary has evolved in direct proportion to the increased complexity of commercial property transactions. A lot of information can and should be included in the lease summary. Much of this information is critical to the valuation and administration of property leases and portfolios. However, it is important to recognize that the lease summary must be cleverly phrased to allow the landlord or tenant to achieve their goal of understanding the basic provisions of the lease without having to refer to the actual lease document.
Attorney, R.K. DEWAN & CO.