What is lease abstraction?
Commercial real estate contracts are lengthy documents; it’s not uncommon for them to reach 100 pages or more, often with multiple addendums and break clauses.
Their sheer complexity means that it’s often not practical for commercial lease managers, legal teams and other stakeholders to work directly with the contract documents themselves as a day-to-day reference for tenancy details. This is particularly true for businesses working with large numbers of leases, either as a landlord, tenant or investor.
Instead of digging through contracts directly, real estate managers rely on a summary document containing the key details of a lease, known as a lease abstract.
What is lease abstraction?
Lease abstraction is the process of summarising the key information contained within a lease contract into a consistent format that’s easier for landlords, tenants, property managers and other stakeholders to work with.
What is a lease abstract?
A lease abstract is usually a two-page summary document containing lease data in a set of standardised fields. A lease abstract will contain information on the lease period, start and end dates, landlord and tenant details, property and permitted use information, details of rent schedules, maintenance charges, taxes, discounts, and many other details which allow a lease manager to get a birds-eye view of the terms of a lease contract.
What is a lease abstract template?
If a company deals with a large number of leases, it’s important that lease abstracts are maintained in a consistent format, so they’re easy to compare and manage in bulk. A lease abstract template lists all of the details which should be included in a lease abstract for a commercial real estate lease, ready to be filled in for each lease.
Why is lease abstraction important?
It’s crucial that businesses have a clear understanding of their real estate commitments, as this is typically amongst their biggest expenses. Staying on top of lease terms ensures that invoices and payments are accurate, and reduces the risk of over or underpayment.
Lease abstraction makes it easier to manage lease data across a large number of leases. Manually working through hundreds or even thousands of lease contracts, each with their own individual clauses and addendums, can be almost impossible, so lease abstraction is vital to ensure that lease managers are able to keep up to date and effectively manage large portfolios.
Abstracting lease data also makes it far easier to analyse. Ensuring that key lease terms are presented in a consistent format makes it easier to compare terms across multiple leases, and make data-driven strategic decisions. Lease abstraction also makes it possible to integrate lease data into other systems, such as accounting platforms or lease administration software. This makes it much more accessible across your organisation, reducing silos and allowing teams to develop new insights and spot potential efficiencies more easily.
Lease abstraction in real estate
Lease abstraction is an important process for real estate businesses, particularly those who deal with commercial leases, which are typically far more complex than residential lease contracts. For landlords, lease abstraction streamlines the process of managing a portfolio of leased properties, helping property managers to stay on top of contract renewals, and to ensure that tenants are billed accurately, minimising the risk of revenue leakage as a result of human error or oversight.
Lease abstracts are also vital for tenants, particularly those with a high number of property leases, for example retail chains or other multi-site organisations. Property costs are a significant portion of many companies expenses, so understanding a company’s lease commitments is an essential requirement for solid strategic planning, as well as for communicating an accurate view of a company’s assets and profitability in the case of a sale or change of management.
Having a clear view of current lease commitments is also vital for compliance, ensuring that your company is meeting its financial reporting responsibilities under IFRS 16 or ASC 842. Maintaining an accurate understanding of lease commitments is also essential to minimising a company’s financial and legal risk levels, ensuring that they remain in compliance with contractual terms and avoiding potential liability or reputation damage.
The lease abstraction process
While lease abstracts save time and reduce risk, manual lease abstraction is a time consuming process. Defining a lease abstract template to ensure that all the critical details of a lease are captured accurately is a challenging task in itself, given the high level of variability in commercial real estate contracts.
Once a template has been created, reading a lease and creating a lease abstract is a painstaking manual task – often, there are so many addendums associated with a lease that ensuring that a data field is correct can be a real challenge. Manual lease abstraction requires a significant time investment, and must be carried out by somebody with a solid understanding of lease contracts to ensure that the completed abstract accurately reflects the contract wording.
How has AI changed lease abstraction?
Artificial Intelligence is revolutionising the lease abstraction process. Specially-trained deep learning models are able to “read” a lease contract and extract the key data into a structured format ready to feed into lease administration software, with a full audit trail allowing for easy verification of the extracted data.
Rather than simply dumping data into fields, AI can be trained to understand the ontology of real estate leases – that is, the way information is structured and how different fields relate to one another. This means that, for example, an AI could infer a contract end date from a start date and lease period even if the end date is not specifically stated in the lease. This gives a much more meaningful data set than simply searching a document for key terminology.
Futureproofing your lease abstraction
If your business needs to maintain an up-to-date view of multiple commercial real estate leases, a lease abstraction platform like MRI Contract Intelligence could revolutionise your internal processes, helping you to save time and money whilst reducing compliance risk.
With powerful deep learning technologies, MRI Contract Intelligence can streamline the lease abstraction process, surfacing powerful insights and fuelling strategic decision making.
Find out more about how MRI Contract Intelligence AI lease abstraction can help you today.
Priam Properties was a mid-sized real estate private equity firm that’s looking to grow in size and go public, yet maintain flexibility through a lean staff and operation. Understanding the crucial role of technology in achieving their goals, P