This cautionary tale is about a smart, yet Excel-dependent victim unknowingly overpaying $157,920 on a property lease. Not because of a corrupt landlord or getting tricked into a scam. The significant overpayment was simply due to a lack of data insight and access to information.
Unfortunately, shocking accounts of overpayments on leases occur more often than imagined. In the case referenced above, the lessee used spreadsheets for lease administration and lease accounting, believing these tools to be sufficient.
Despite Excel being a useful application with countless benefits, the popular software does have limitations which can often lead to costly errors.
Here’s how the story goes...
Seven years ago, the business professional had entered into a lease for office space. The contract, which was coincidentally kept in a filing cabinet, included a lease term that was quite favorable to the lessee. On every anniversary of the lease, the rent was to be fully abated. But because there was no function in Excel to alert the accountant to the change in rent due, the usual rent of $22,560 had been paid on each twelfth month, resulting in those seven extra payments equaling an overpayment of $157,920.
Lease management software could have avoided this issue.
Had the company used a lease administration software, the rent abatement terms and conditions would have been captured into the system at the commencement of the lease. An automatic alert would have notified Accounts Payable that the rent due for that anniversary month was actually $0.
If there were any question about the accuracy of that alert, the contract would easily be accessed with just a few clicks. The accountant would then have the option to immediately verify the terms of the lease and be certain that the rent for that month was, indeed, paid in full.
Remitting payment for rent when it should be abated is only one of the ways that you may be overpaying on your leases.
Buyers Beware: 5 other ways that a business can overpay its rent:
Whether you’re a franchisee, small business or commercial real estate tenant, if you’re managing your leases manually, you may be making one or more of these costly mistakes.
1. Annual increases
It may surprise you to learn that it is not uncommon to receive an invoice from a landlord with a lease increase amount that does not match the increase outlined in the lease. If a business has only a few leases, it’s relatively easy to keep up with annual escalations in rent payments or check for any discrepancies between the invoice and the contractual obligation.
But if you have multiple leases with annual rent increases that all occur at various times during the year, managing your portfolio with manual processes can be overwhelming. For each lease, you’ll need to verify the rent increase - which includes physically hunting down the contract and locating the pertinent details - recalculate the amount of rent due per the contract rather than the amount on the invoice, then finally pay the correct monetary increase on time.
2. Incorrect invoices
Most of the time, you’d be right to assume that the amount due on an invoice from your landlord is correct. But it never hurts to verify the amount against the lease, unless you have numerous leases to be verifying per month. That process of double checking each invoice can be daunting. Do you have time to compare each invoice with each lease? On the other hand, can you afford to count on the accuracy of the invoice? Even a small difference between what is actually owed and what you pay adds up over the life of a lease. Overpaying by only $100 each month over a five-year period results in over $6,000 of rent paid that was not owed.
3. Missed renewal deadlines
There is usually a financial incentive to renew a lease during the renewal period specified in the contract - typically lower monthly rent than if you allow the lease to expire and subsequently have to renegotiate terms. Again, if you’re trying to keep up with renewal dates for a portfolio of leases, all with different renewal periods, you may miss the opportunity to lock in more favorable terms.
4. Holdover rent clauses
Lessees should be aware that a holdover clause, or holdover provision, generally allows the lessor to receive a higher (sometimes as much as 200% higher) rent if a tenant remains in a leased space after the lease has expired.
While considering a move or the negotiation of a new lease with the current landlord, a company may decide to stay in place after a lease’s expiration. Under the old lease, at a rate of $12 per square foot per year, the monthly rent was $5000. If the company doesn’t sign a new lease before the old one expires, it effectively exercises the holdover clause and could see the rent rise significantly - to an amount between $7500 and $10,000 per month.
5. CAM overpayments
Common area maintenance charges can be mystifying. If you’ve ever suspected that you’re being overcharged for CAM expenses, you’re not alone. Unless you undergo a comprehensive audit of CAM charges, it’s really very difficult and time-consuming to ensure the accuracy of the amount you’re being charged.
All the aforementioned costly circumstances can easily be avoided by using automated lease management software. These unified, cloud-based solutions are designed to simplify the entire lease administration process.
Comprehensive leasing administration software streamlines the management of your leases by providing the following benefits:
- Anytime, anywhere access to all lease data.
- Automatic alerts for critical dates ensure you never miss a payment--or pay when there’s no remittance required.
- Customized reporting provides flexibility to meet the unique needs of your company.
- Support for all types of leases, including real estate and equipment.
- Reliable tracking of renewals, rent adjustments, security deposits, expirations and insurance.
- Seamless integration with your accounting or ERP system.
- CPA-approved compliance with the new lease accounting standards.
At AMTdirect, our team has been helping clients avoid overpaying rent, but reduce their costs of occupancy, and eliminate time-consuming manual tasks for over 20 years.
We would love the opportunity to learn more about your challenges and offer a lease accounting solution that will truly benefit your bottom line..