Deloitte 2010 lease administration benchmarking survey

Deloitte 2010 lease administration benchmarking survey

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Executive summary Contents Executive summary 1 Introduction 3 Organizational structure 4 Human resources 5 Outsourcing 7 Technology 8 Lease abstraction 10 Lease audits and reviews 12 Deloitte 2010 Lease Administration Benchmarking Survey

Executive summary Executive summary Many companies are managing dozens, or even hundreds of leases. Naturally, lease administration departments want to implement efficient processes to reduce expenses, as well as capture accurate and timely data on their leases in order to make appropriate decisions in pursuing their business strategy. Updating its 2006 benchmarking survey, Deloitte conducted a survey to assess how companies were approaching lease administration issues. The survey was completed by 209 executives at companies involved in lease administration including companies that lease commercial space ( tenants ), building owners who lease commercial space to tenants ( owners ), and companies that provide lease administration services ( service providers ). Key findings: Centralized structure favored. With technology making it easier to supervise diverse operations, many companies are seeking to improve management and reduce costs by centralizing. More than three quarters of both tenants and owners used a centralized organizational structure for lease administration, up from two-thirds in the 2006 survey. Hiring skilled lease administrators now easier. Given the weaker economic conditions, only 15% of tenants and owners said it was very difficult to hire skilled lease administrators, down from 30% and 38%, respectively, in the prior survey. Salary levels may need to be reassessed. Once the labor market rebounds, companies may need to raise salaries to hire the skilled lease administrators they need. While 46% of tenants offered typical starting salaries for lease administrators of $60,000 or more, only 23% of owners and service providers provided starting salaries this high. Outsourcing used by many companies. Roughly half of tenants and owners said they used third-party service providers to handle some or all of the work of lease administration. Roughly two-thirds of tenants and owners who outsourced used service providers for lease abstraction, while three quarters of tenants used them for lease audits. Some rely on Microsoft Office applications for lease administration technology. Roughly three quarters of the companies surveyed used a lease administration technology system, including 95% of tenants that managed 100 leases or more. However, 20% of companies said they used Excel or Access to handle lease administration, rather than one of the software applications specifically designed for the job. Not all companies staying current with technology. Although many companies reported that they recently purchased or upgraded their lease administration software, roughly one third of tenants and owners had not done so for three years or more. Progress on integration of lease administration and accounting systems. The percentage of tenants who said their lease administration technology systems were not integrated with their financial systems declined from 81% in 2006 to 59% in the current survey. Among owners, only 22% said they had a stand-alone lease administration system, down from 46% in the prior survey. Deloitte 2010 Lease Administration Benchmarking Survey 1

Executive summary Companies focusing on abstracting the most important lease administration attributes. Although 71% of tenants, owners, and service providers said they abstracted lease attributes into lease administration databases, there were still 30% of companies that did not follow this practice. Many companies now appear to realize that they can be more effective and efficient by only abstracting the most important lease attributes, rather than attempting to be comprehensive. Among owners, 70% said they abstracted less than 50 attributes, while only 53% abstracted this number in 2006. For tenants, 53% said they abstracted less than 50 attributes, roughly the same as in the prior survey. Data accuracy and integrity remains a challenge. Ensuring the quality of data was considered to be a very significant challenge by 30% of tenants, 40% of building owners, and 51% of service providers. Employing reliable and consistent data is essential for accurate reporting and sound management decisions. Benefits from lease audits and reviews. Roughly two thirds of tenants that conducted lease audits said that they had resulted in cost reductions, while about half of the owners who conducted lease reviews said they had resulted in increased expense recovery. While the benefits achieved depend on the nature of the lease, in Deloitte's experience, lease audits and lease reviews can result cost reductions or expense recovery of $0.50 to $2 or more per square foot. Deloitte 2010 Lease Administration Benchmarking Survey 2

Introduction Introduction What approaches do companies use to manage their commercial leases and what are evolving industry practices? To gain insights, Deloitte conducted a survey of corporate tenants, building owners, and service providers in December 2009 and January 2010. Bayer Consulting conducted the survey and analyzed the data on Deloitte s behalf. The 2010 survey was completed by 209 executives, including 89 from companies that lease space from building owners ( tenants ), 101 from companies that own and lease commercial space ( owners ), and 69 from companies that provide lease administration services ( service providers ). These numbers total to more than 209 as some companies were both owners and service providers. The survey also examined the views of executives on the outlook for the real estate market. The results of that portion of the survey are presented in the report, Deloitte Real Estate Outlook. The corporate tenants were in a variety of industries including financial services (18%), professional services (12%), retail (12%), life sciences and healthcare (12%), and technology (10%). (See Figure 1.) The respondents represented companies with both large and small lease administration departments. Among corporate tenants, 52% managed 100 leases or more, while 48% managed less than 100 leases. Building owners and service providers tended to manage more leases than tenants. For building owners 42% managed 250 leases or more with the remainder managing fewer leases. For service providers, 69% managed 250 leases or more, while 31% managed less than 250 leases. Figure 1 Industry of corporate tenants Financial services 18% Professional services 12% Retail 12% Life sciences and health care 12% Technology 10% Public sector 7% Manufacturing 6% Energy and resources 5% Telecommunications 5% Media 5% Other 9% Note: Some percentages were rounded, thus the total may not equal 100. This report presents the results of the survey in the following six key areas of lease administration: organizational structure, human resources, outsourcing, technology, lease abstraction, and lease audits and reviews. Deloitte 2010 Lease Administration Benchmarking Survey 3

Organizational structure Organizational structure Most executives said their companies had a centralized lease administration structure. In fact a centralized approach has become more common since the 2006 survey, likely a result of companies looking to reduce costs, and the increased ease of control through technology. Among tenants and owners, 79% had centralized management, up from roughly two thirds for each group in 2006. For service providers, 66% of respondents reported having centralized management of lease administration, compared to 59% in the prior survey. In terms of reporting structure, 60% of tenants said their lease administration group reported to the company's corporate real estate department, while another 20% cited the accounting/finance function. In contrast, there was no consensus among owners or service providers; the reporting lines of their lease administration departments may be less important since real estate is their primary business. Owners named a variety of different departments as overseeing lease administration including property management (28%), accounting/finance (23%), and leasing/marketing (17%). Service providers named corporate real estate (28%), property management (27%), and accounting/finance (24%). When respondents were asked how lease administration staff allocated their time, no single activity accounted for more than 20% of staff time. The activities that accounted for the largest portion of time were reporting (19%) and abstraction (17%). Accounts payable, budgeting/forecasting, and common area maintenance reconciliations ( desktop reviews ) were other activities that also accounted for a relatively significant amount of staff time. (See Figure 2.) Figure 2 Allocation of lease administration staff time Property taxes 6% Other 7% Reporting 18% Accounts receivable 12% Desktop reviews 13% Abstraction 17% Budgeting/ forecasting 13% Accounts payable 14% Deloitte 2010 Lease Administration Benchmarking Survey 4

Human resources Human resources Most lease administration departments were relatively small, especially at companies managing smaller numbers of leases. Among tenants that managed fewer than 100 leases, 79% had only one or two full-time employees (FTEs) in their lease administration department, while almost half of tenants that managed 100 leases or more had three to 10 FTEs. Even among larger tenants, only 20% had 11 FTEs or more. (See Figure 3.) Similarly, 60% of owners that managed fewer than 250 leases had only one or two FTEs. Among larger owners, 44% had three to 10 FTEs, while 27% had 11 FTEs or more. Figure 3 Number of FTEs in lease administration function Tenants 1-2 FTEs 3-5 FTEs 6-10 FTEs 11+ FTEs 1-99 Leases 79% 3% 8% 11% 100+ Leases 33% 30% 18% 20% Owners 1-249 Leases 60% 26% 7% 7% 250+ Leases 29% 31% 13% 27% Service providers 1-249 Leases 33% 28% 11% 28% 250+ Leases 38% 13% 13% 38% Note: Some percentages were rounded, thus the total may not equal 100. Given the current weaker economic conditions, fewer respondents reported difficulties in hiring skilled lease administrators in the 2010 survey than they did in 2006. Only 15% of tenants and the same percentage of owners said it was very difficult to hire skilled professionals, down from 30% and 38%, respectively, in the prior survey. However, executives at larger companies reported somewhat greater difficulty in hiring. Among tenants with 100 or more leases, 20% reported significant difficulty compared to 5% for smaller tenants. For owners, 20% of those with 250 or more leases said it was very difficult to hire compared to 9% of those managing fewer leases. Organizations that manage large numbers of leases are likely to have more stringent requirements for the types of skills and experience they require among their lease administration staff. The highest educational level achieved by lease administration staff was a bachelor's degree for 59% of respondents, while 15% named a high school degree and 11% said that some staff had a postgraduate work or degree. (See Figure 4.) In addition, many respondents reported that their lease administration department had employees with legal or accounting training, especially at larger organizations. Among tenants managing 100 leases or more, 67% said their lease administration Deloitte 2010 Lease Administration Benchmarking Survey 5

Human resources department had employees with legal background, compared to 44% of smaller tenants. Similarly, 61% of owners managing 250 leases or more said they had employees with legal training, compared to 31% of smaller owners. An accounting background was even more common for lease administration employees. Among owners, 90% of larger companies as well as 75% of smaller organization had employees with accounting training. Roughly 85% of both larger and smaller tenants also had employees with an accounting background. However, many respondents said their companies did not require previous real estate experience when hiring new lease administrators 48% of tenants, 58% of owners, and 53% of service providers. For tenants, however, requiring prior real estate experience was much more common among larger organizations. Only 38% of tenants managing 100 leases or more did not require previous real estate experience compared to 63% of those managing fewer than 100 leases. To obtain the skilled lease administrators they need, many firms may need to reconsider their salary scales. Only 23% of owners and service providers had a typical salary of $60,000 or more for their lease administrators. In fact, 14% of both owners and service providers only paid a typical salary of less than $40,000. Tenants tended to offer higher salaries, with 46% paying a typical salary of $60,000 or more. (See Figure 5.) There had been little turnover in lease administration departments in 2009. Only roughly 30% of tenants and owners and 40% of service providers reported any vacant positions in their lease administration departments in 2009. Just 11% of tenants and 12% of owners reported turnover of 10% or more. However, turnover was somewhat more common in larger organizations. Among tenants managing 100 leases or more, 42% reported turnover in 2009, compared to just 18% for tenants managing fewer leases. Similarly, 41% of owners managing 250 leases or more had turnover compared to 15% of smaller owners. One explanation may be that lease administration departments in larger companies have a more demanding workload. In addition, they tend to require a higher level of skills since they face more complex problems and are more likely to employ sophisticated technology and lease administration databases. Figure 4 Highest educational level of lease administration staff Figure 5 Typical annual salary for lease administrators Postgraduate work or degree 11% High school degree 15% Ten an ts 7% 20% 26% 46% Owners 14% 28% 35% 23% 2-year college degree 15% Service providers 14% 37% 26% 23% Less than $40K $40K - $50K $50K - $60K $60K or more Note: Some percentages were rounded, thus the total may not equal 100. Bachelor's degree 59% Deloitte 2010 Lease Administration Benchmarking Survey 6

Outsourcing Respondents were divided in their use of third-party service providers to manage lease administration responsibilities, with 56% of tenants and 44% of owners saying that they outsourced some or all of this work, roughly the same percentages as in the 2006 survey. The most common function outsourced by tenants was lease audit/reviews, cited by 77% of tenants that outsourced, compared to only 19% of owners. (See Figure 6.) Roughly two thirds of both tenants and owners that outsourced said they used third-party service providers for lease abstraction. The other functions outsourced frequently were cost controls, cited by 54% of the tenants, and accounting named by half the owners. Relatively few companies that outsourced said that lease administration services for their U.S. leases were performed in other countries 24% of tenants and 14% of owners. Similarly, only 16% of service providers said they perform work for U.S. leases in other countries. The countries named most often as sites of lease administration activities were Canada and India. Figure 6 Lease administration activities outsourced Base = Firms that outsource lease administration Lease abstraction Tenants Owners 64% 62% Lease audits/reviews 19% 77% Cost controls Document scanning Accounting 54% 39% 43% 35% 33% 50% Deloitte 2010 Lease Administration Benchmarking Survey 7

Technology The use of a lease administration technology system has become a standard practice, with roughly three quarters of tenants, owners, and service providers saying their company had one. In fact, the use of a lease administration technology system has become almost universal among larger companies 95% of tenants that managed 100 leases or more, as well as 80% of owners and 88% of service providers that managed 250 leases or more, reported using a technology system. (See Figure 7.) By far the most common approach to securing a lease administration technology system was to purchase a vendor application, which was cited by 90% of respondents. The remaining respondents said their company had a proprietary system that was either developed in house or by a vendor. When asked to name the software they used for lease administration, some surprising answers emerged. While Yardi Voyager was cited by 21% of respondents, 20% named Microsoft Office (i.e., Excel and Access). (See Figure 8.) The respondents who said they used Microsoft Office applications included 12% of tenants, 27% of owners, and 37% of service providers. Companies that are using Excel or Access may wish to consider whether they would gain any advantages by instead using one of the vendor applications that has been designed specifically to meet the unique needs of lease administration. Beyond these two applications, the others named most often were Intuit CRE Manager/MRI (16%), SAP (11%), and Yardi CTI (9%). Figure 7 Use of lease administration technology system Tenants 1-99 leases 53% 100+ leases 95% Owners 1-249 leases 59% 250+ leases 80% Service providers 1-249 leases 78% 250+ leases 88% Roughly two thirds of both tenants and owners said they had purchased or upgraded their lease administration software within the last three years, indicating that most companies appear to be investing in staying relatively current with their technology application. However, the fact remains that many companies have not continued to invest 37% of tenants and 34% of owners had not purchased or upgraded their software for three years or more. Deloitte 2010 Lease Administration Benchmarking Survey 8

Another challenge is to make optimal use of the lease administration technology system in financial reporting and decisions, and it appears that more companies are making progress in this area. In the 2006 survey, 81% of tenants said they had a lease administration technology system that was not part of their ERP solution and integrated with their financial system, but that number had dropped to 59% in 2010. Similarly, only 22% of owners said they had a stand-alone lease administration technology system, down from 46% in the last survey. Scanning lease documents in order to gather data more efficiently has become an accepted industry practice and an approach that all companies should seriously examine. However, there was a significant number of companies that did not scan lease documents 11% of tenants, 20% of owners, and 17% of service providers. Companies that manage larger numbers of leases were more likely to scan their lease documents, but companies that managed fewer leases were even less likely to do so. For example, while only 5% of tenants that manage 100 or more leases said they did not scan their lease documents, 18% of those managing fewer leases failed to do so. Among owners who managed less than 250 leases, 31% did not scan their documents compared to 10% of owners who managed more leases. Figure 8 Most popular lease administration software applications Yardi Voyager 21% Microsoft Office (Excel, Access) 20% Intuit CRE Manager/MRI 16% SAP 11% Yardi CTI 9% Oracle JD Edwards 8% TRIRIGA 8% Oracle PeopleSoft 7% Timberline 7% VirtualPremise 7% Accruent 6% Note: Percentages do not total 100% since respondents could make multiple selections. Deloitte 2010 Lease Administration Benchmarking Survey 9

Lease abstraction Most companies were abstracting lease attributes into lease administration databases 74% of tenants, 63% of owners, and 71% of service providers. Abstraction was more common among larger companies. Among tenants that managed 100 leases or more, fully 93% abstracted lease attributes compared to 57% among those managing fewer leases. Similarly, 80% of building owners with 250 leases or more followed this approach compared to 43% of smaller owners. Across all three groups, almost 20% of employee time was spent on lease abstraction, the activity accounting for the second highest percentage of time. Larger organizations were devoting more staff time to building sophisticated lease administration databases. Building owners managing 250 or more leases spent 24% of staff time on abstraction, compared to 12% for owners with fewer leases. Tenants with 100 or more leases spent 18% of their time on lease abstraction compared to 12% for those managing fewer leases. Lease administration databases were used in a variety of important areas. Leading the list was accounting, where more than 80% said they extensively used their lease administration database. The other two areas cited most often were budgeting/forecasting (70%) and property management (67%). (See Figure 9.) Figure 9 Areas in which lease administration database is used extensively Base = Firms with lease administration database Accounting 81% Budgeting/forecasting 70% Property management 67% Legal 46% Brokerage/transactions 38% More companies appeared to recognize that lease administration databases should focus on the most important lease attributes, rather than attempt to capture every potential attribute. Among building owners that abstract lease attributes, 70% reported using less than 50 attributes, compared to 53% in 2006, while 64% of service providers reported this number of attributes, compared to 54% in the previous survey. Among tenants, 53% said they abstracted less than 50 attributes, roughly the same figure as before. (See Figure 10.) Yet, some companies continued to abstract 100 or more attributes 17% of tenants, 8% of owners, and 11% of service providers. Deloitte 2010 Lease Administration Benchmarking Survey 10

Ensuring the accuracy and integrity of data within lease administration databases remains a challenge. This issue was considered to be a very significant challenge by 30% of tenants, 40% of building owners, and 51% of service providers. But corporate tenants appear to have made progress in this area. While 30% of tenants said that ensuring data accuracy and integrity in their lease administration databases was a very significant challenge, this compares with 48% in the 2006 survey. In contrast, the percentages of owners and service providers who said they faced significant challenges in ensuring the accuracy and integrity of data remained steady since the 2006 survey. Figure 10 Number of lease attributes abstracted Base = Firms that abstract lease attributes Tenants 63% 21% 17% Owners 70% 22% 8% Service providers 64% 26% 11% Less than 50 50-99 100 or more Note: Some percentages were rounded, thus the total may not equal 100. Deloitte 2010 Lease Administration Benchmarking Survey 11

Lease audits and reviews Lease audits by tenants and lease reviews by owners have become standard practice, with 77% of tenants and 85% of owners saying they conduct them. Among tenants that managed a larger number of leases, they were even more widely used 90% of tenants with 100 or more leases reported conducting lease audits. In addition, roughly half of the firms providing lease administration services reported conducting lease audits and half reported conducting lease reviews. Only about one quarter of the service providers reported conducting neither lease audits nor lease reviews for clients. When asked about the benefits, roughly two thirds of tenants said their lease audits had resulted in reduced real estate costs, with one quarter saying the reductions had been significant. (See Figure 11.) Although most building owners also said that lease reviews had generated benefits, their assessments were less positive. Roughly half of the owners said that lease reviews had resulted in increased expense recovery, but only 13% said the increases had been significant. Figure 11 Benefits from lease audits and lease reviews Base = Executives at companies that conduct lease audits or lease reviews Ten an ts: Cost reduction from lease audits 27% 36% 37% Owners: Expense recovery from lease reviews 13% 39% 48% Significant Some None/little Deloitte 2010 Lease Administration Benchmarking Survey 12

Contacts E.J. Huntley National Real Estate Consulting Leader Deloitte Financial Advisory Services LLP +1 713 982 4739 ehuntley@deloitte.com Josh Leonard Lease Advisory Partner Deloitte Financial Advisory Services LLP +1 213 553 1717 josleonard@deloitte.com Vinnie Borriello Lease Advisory Director Deloitte Financial Advisory Services LLP +1 212 436 3453 vborriello@deloitte.com Hank Tremaine Lease Advisory Director Deloitte Financial Advisory Services LLP +1 703 251 3650 htremaine@deloitte.com Copyright 2010 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu