Real estate is one of the largest operating expenses for retailers worldwide. Second only to labor costs, rent can account for more than 30 percent of expenses and, according to research from JLL and IBIS World, can absorb up to 13 percent of sales revenue. However, despite their significance, leases aren't always properly managed.
According to a survey of commercial real estate professionals, 80 percent of tenants have been negatively impacted by inadequate lease controls, and 84 percent of those tenants were impacted due to poor lease management, including missing deadlines on options to extend their leases, miscalculating lease costs, and forgetting to renegotiate unfavorable lease terms when such opportunities arise.
Until recently, retailers may have been able to get away with loosely managing and tracking their leases. However, the new lease accounting standards (ASC 842, GASB 87 and IFRS 16) require public and private companies, in addition to government entities, to record leases on the balance sheet. While this is an undeniable divergence from previous guidance, it comes with a silver lining, providing companies with an opportunity to prioritize a strong lease management strategy. Doing so can introduce a range of benefits, including major cost and time-saving opportunities, as well as accurate lease accounting and the ability to make faster, better-informed operational decisions.
The first — and perhaps most important — step toward reaping the rewards of proper lease management is to recognize the value of a centralized system of record.
Odds are you or your business have already put in substantial effort to negotiate the best possible terms for your leases, including countless hours from your internal business and legal teams. Unfortunately, all this hard work will go to waste if you don't properly track the details of your leases after they're executed. Without it, you can easily undermine the benefits of each painstakingly negotiated clause.
While some retailers attempt to manually manage their leases within Excel, this approach can be quite cumbersome if you have a portfolio of leases, which is where a centralized system of record comes in.
While adopting dedicated technology might seem like extra work and an added expense, the truth is it's much more efficient and less costly in the long run. For example, we found that, on average, private companies using lease management software were able to cut over 40 percent of their costs gathering the necessary lease information needed to comply with lease accounting standard ASC 842. Those that didn't use a dedicated platform spent an average 1,582 hours collecting that data, as opposed to those that did, which spent only 915 hours on the same process. That's a savings of over 660 hours.
Prioritize a Solution That Also Meets Your Lease Accounting Needs
New lease accounting standards have ushered in a more complicated way to account for leases. Furthermore, impacted organizations are obligated to adopt these new standards, or else they risk inaccurate financial reporting, increased audit fees and fines, as well as damaged credibility.
Through the years, we’ve heard many organizations cite the same pain point when transitioning to the new standards: the inability to handle routine lease modifications and subsequent re-measurements while also maintaining important internal controls and auditability. To achieve and sustain lease accounting compliance, accounting teams need complete and accurate lease data, timely alerts of lease changes, and a way to ensure policies, procedures and controls are maintained.
If you decide to invest in dedicated technology, look for a solution that's flexible enough to handle complex leasing scenarios and reporting requirements. This will provide you with visibility across your portfolio and a foolproof way to report on your leases. Consider integrating your new technology with your existing solutions for maximum impact.
According to recent data from PwC, 60 percent of executives say digital transformation is their most critical growth driver in 2022. The retail sector is not excluded from this trend. In fact, many are reliant on multiple technologies to keep up with evolving consumer behaviors in response to the pandemic. With this in mind, be sure your system integrates your lease data with your standing ERP systems, including scheduling, monitoring, managing and automating data imports and exports.
By streamlining data flows across your tech ecosystem, you’ll have a clearer picture of how the terms of your leases are impacting different areas of your business. Full visibility across your lease portfolio also will empower you to make informed and confident operational decisions. For example, consider the many retailers impacted by COVID-19. Those that had access to centralized lease data were in a much better position than those that didn’t. With the ability to quickly visualize the terms of their leases, they didn't have to spend precious time digging around for them. They had what they needed to make critical business decisions, such as shuttering locations or renegotiating terms with their landlords. With margins so tight and lease costs so high, having proper control over this second-largest operating expense can have a material impact on retailers’ overall profitability.
Marc Betesh is the founder and executive chairman of Visual Lease, the complete lease accounting and management software for ASC 842, IFRS 16 and GASB 87 compliance.