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Lease Abstraction

Lease abstraction is an essential component of due diligence for a multi-tenant commercial property. Lease terms often vary from tenant to tenant. Lease abstraction includes reading the leases, summarizing material issues and research for key items necessary to complete a discounted cash flow analysis. Lease terms and options impact both the quantity and quality of rental income. Lease terms affect the quantity of rental income by adjustments made for factors such as rental rates and escalations.Rental rates can increase based on a variety of factors including CPI and agreed upon terms. The base level for calculating escalations needs to be reviewed for each lease. Lease terms affect the quality of rental income based upon factors such as the tenants rights to lease additional space at a predetermined price or to give backspace if they no longer need it.

Lease abstraction is a tedious and time-consuming process, particularly for properties with numerous tenants. Each lease is often 20 to 100 pages in length. In many cases, the lease form varies from tenant to tenant depending on whether the tenant or the landlord originated the lease form and which of a series of owners executed the original lease. Multiple special terms can be included in various portions of the lease. Special terms typically are not financially significant. However, special terms regarding renewal rate options, termination rights, rights to give back or take additional space and co-tenancy clauses can sharply impact value. Lease abstraction both summarizes lease terms and analyzes their effect. Analyzing special provisions may require a detailed analysis of several interconnected issues. These modifications can substantially impact cash flow and the value of the property. Special provisions with the potential to severely impact cash flow include termination options, right to "return" space, renewal options, first right of refusal at a fixed rate and escalation clauses. Most special provisions clarify and resolve the needs of the subject tenant. In limited cases, they can provide either uncertainty and/or unfavorable cash flow. Following are some of the lease terms which should be considered when conducting a lease abstraction:

  • Renewal rights;
  • First right of refusal;
  • Co-tenancy clauses (tenant A can terminate lease if tenant B leaves the center);
  • Right to terminate if the building does not have adequate space to meet the tenants requirements or if other factors occur;
  • Escalation clauses;
  • Pricing for after-hours electric;
  • Parking rights and pricing;
  • Signage rights;
  • First right of refusal to purchase the building;
  • Right to reduce rent if certain conditions are met to;
  • Write to give back space which is no longer needed;
  • Right to take additional space at a predetermined price.

A complete lease abstraction must be prepared before it is possible to perform financial modeling for an acquisition. A discounted cash flow analysis of a multi-tenant commercial property requires information regarding many fields of data. The lease abstraction process provides this data. The scope of the engagement can include research and analysis of whether key events (such as a lease renewed or right of first refusal) are likely to occur. Most of the estimates of future events required for a discounted cash flow analysis require limited analysis. However, several issues (such as whether the largest tenant is likely to renew) can necessitate meticulous research, analysis and judgment. The lease terms will dramatically affect current and future cash flows. The combination of lease abstraction and financial modeling (performed using a program such as Excel or Argus) provides the investor meaningful insights into the probable cash flow for the investment.

O'Connor and Associate's staff complement of over 50 real estate professionals can complete a lease abstraction to mitigate your risk. They can also handle other due diligence tasks. These professionals are supported by an experienced staff of over 100 who are accustomed to complex assignments. Our team has experience in all aspects of real estate including acquisitions, due diligence, ownership, appraisal, property tax appeals and dispositions. Reduce your risk and stress by utilizing O'Connor and Associate's breadth and depth of experience to evaluate your real estate investments.

To obtain more information on O'Connor & Associates lease abstraction services, call or email Larry Brewster at 713-686-9955 or fill out our online form.


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