Automation Aids Retail Expense Recovery

By Robert Entin, President
Integrated Business Systems
Fairfield, New Jersey

Today, more than ever, integrated automation solutions are vital to owners and managers of retail real estate. The need for automation is particularly acute in lease administration, especially in the highly specialized, complex field of managing retail malls and strip centers.

So much of retail lease administration hinges on the issue of expense recoveries involving taxes, operating costs, utilities and other items. The billing of retail recoveries is perhaps the most complex process in the management of commercial real estate. Managers of office buildings also have complications in their calculations, however, there are significantly fewer variables in the process. So while office recoveries have complications, the formulas and calculations are easier to get one's arms around.

Retail is another matter entirely. Tremendous variation exists in lease terms, based on different factors, not the least of which is the clout of the individual tenant. Often, each tenant has a different formula and schedule to calculate their recovery. A variety of factors impact how much each tenant will pay. Administrative fees, too, differ considerably from those typically incurred in office properties. Clearly, expense recoveryon retail property is an exceptionally complicated science, and thus automating the process is particularly tricky.

A surprising number of owners and managers still calculate recoveries manually, without a high degree of automation. Many utilize spreadsheet programs, which leaves their organizations vulnerable on two fronts. First, the cost of the calculations can be significant, especially for a large portfolio with a large number of tenants. Second, and potentially far more damaging, human error can lead to costly miscalculations. Without the structure and control of a tightly automated system, accidental omissions and mistakes are unavoidable. A top-quality automated system ensures a proper structure and audit mechanism to minimize or eliminate errors.

RETAIL COMPLEXITIES

In a typical office building, the percentage of operating expense reimbursement is stipulated in the lease agreement. In a shopping center, however, a tenant's reimbursement percentage is generally based on a formula. While the numerator of such a formula is straightforward, the formula for the denominator is often quite complex. These denominator formulas will typically contain excluded areas and occupancy factors within the calculations.

Much of the complication arises out of the need to adhere to recovery terms dictated by anchor tenants. This creates a strain on calculating the formulas for the anchor as well as the "shop" tenants. A mall manager might very well end up with 40 different denominator calculations for 40 different tenants. The calculations are further complicated if - as can happen during a downturn - there is a dramatic rise in vacancy.

The need for seamless integration has become especially pressing as REITs and other publicly traded entities buy more and more commercial properties. But the need for accurate calculations, arrived at with maximum efficiency, is equally important for private owners.

The existence of a demonstrable, tightly integrated escalation system will assist in dealing with tenant disputes and may lead to a reduction in disputes based on the customer being more confident in the landlord's administration skill. Automated recovery systems reduce the incidence of errors significantly, and the personnel requirement becomes more of an audit function than that of a calculation function.

While achieving this level of automation is a clear goal, implementing such a system — especially for a large portfolio of complex leases — is a scary prospect for any manager, and justifiably so. That is why implementation support is absolutely essential. At IBS, we provide a full suite of services for our clients. EVOLVING WITH THE TIMES

Retail lease calculations continue to evolve in their complexity. One interesting unit of measure that we have invented in recent years to assist in calculating dynamic denominations is "vacant square-foot days." This measure accounts for each square foot over time and allows for automated calculations of weighted average vacancies.

Retail leases that track each tenant's sales and billing for a percentage rent have also become commonplace. Our system handles a myriad of complications in this area of management as well.

Beyond achieving automation and accuracy, commercial and retail owners and managers have become increasingly focused on seamless integration of their core accounting functions with other third party applications, such as work order programs, document management programs, etc. At IBS, we take pride in the sophistication of our integration software. We are meticulous in analyzing the data mapping and transformation between our system and a number of leading third-party applications.

The next step in real estate automation will be maximizing the potential of the Internet as a means of connectivity among various management-related systems. While the Internet may provide an improved medium for connectivity, it does not aid in the definition of the business rules that allow two different products to exchange data. The foundation of that data exchange still needs to be perfected. That will require a greatdeal of hard work and intricate mapping - a challenge we have always been and will continue to be equal to the task.

Essentially, all retail owners and property managers should understand that fully integrated solutions do exist and are achievable. At the same time, very few have reached this milestone to full effectiveness. The bottom line is that the core system must be solid, capturing an incredible level of detail. This takes time, but once it has been accomplished, anything is possible.

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Robert Entin is president of Integrated Business Systems (IBS), a Fairfield, NJ-based company whose clients include Mack-Cali, Acadia, Reckson, Vornado and other public and private real estate owners.