Creating Leases

This chapter provides an overview of leases and discusses how to:

• Define general lease information.

• Define lease financial terms.

• Define lease clauses.

• Add notes and attachments.

• Review basic lease information.

• Manage my lease portfolio.

Understanding Leases

Real Estate Management is an integrated solution that effectively manages the entire life cycle of a corporate real estate lease, from lease execution and financial processing through lease expiration and termination.

A lease is an agreement between a lessee (tenant) and a lessor (owner, landlord, or property manager) that defines terms of the rental, such as the period of time and rent amount for a property or multiple properties. The lease is the basis for invoices or vouchers and receipts or payments. You create a lease to enable processing for an invoice or payment for recurring rent and operating expenses for that lease.

You can process everything from a single invoice or payment to the most complex recurring invoices or payments as required by the lease. You can perform cost allocations, rent escalations, and capacity planning for your organization, and establish critical date alerts to notify you when you must take action on or make a decision about a particular lease.

Before you create a lease, you must determine the type. There are two types of leases: payables leases and receivables leases. Your role—landlord or tenant—determines the type of lease that you create.

This section discusses:

• Payables leases.

• Receivables leases.

Payables Leases

Payables leases enable a tenant (lessee) to manage and report on rent, operating expenses, and miscellaneous rents. You can set up recurring payment schedules to facilitate the lease. You can capture specific lease clauses and lease options, and set up critical date alerts to remind you when a lease is about to expire. You can also audit operating expenses, comparing with previous years to ensure continuity of spending.

You create a payables lease when your organization is the tenant (or lessee) and you are issuing rent payments to a landlord (or lessor) for space that you are occupying. You enter the lease terms from your signed lease agreement as a payables lease and set it up for payment processing through Payables. As a result, the majority of your transactions are payables transactions or payments that you are issuing through Payables to be paid to your landlord.

When entering the lease, you can establish recurring rent payments that the system processes on a periodic basis of your choosing. When processing rent payments, the system generates transactions with Payables as the transaction destination. Even manual payments, which include adhoc entries, security deposits, operating expense audits, and percent rent sales reports, can be sent through Payables with their associated accounting ChartFields, as determined by the transaction routing code setup. You can also send through Payables (first as a negative reversal entry of the originating transaction and then as a new entry for the revised payment amount) any adjustment entries caused by changes in security deposits, operating expense audit adjustments, or percent rent sales reports.

For payables leases, the integration points to consider for processing are General Ledger (for straightline accounting), Payables, and Asset Management (for the Asset Repository). Since Billing integration is not needed for Payables leases, any adjustment transactions are sent through Payables as negative voucher entries.

See Defining Transaction Routing Codes.

See Understanding Real Estate Management Accounting Rules.

Receivables Leases

Corporate Real Estate Management sometimes requires landlord billing capabilities for leasing owned property and subleasing leased property. Accounting for all costs and lease income associated with lease management is critical to a landlord (lessor). Receivables leases enable you to collect rent, manage your expenditures, and allocate them proportionately to the departments or other entities.

When you create a receivables lease, you set up recurring invoices that generate automatically in the frequency defined in the lease. You can track lease clauses and options, and set up critical dates to remind you when a lease is due for renewal. You can also set up simple to complex rent terms, track percent rent schedules, and upload percent rent reports to determine the percent increase to bill for monthly rent.

You create a receivables lease when your organization is the landlord (or lessor) and you are submitting rent bills to a tenant (or lessee). For a receivables lease, you enter the lease terms from your signed lease agreements and set up the terms for processing as the landlord. As a result, the majority of your transactions are Billing transactions or bills that you are issuing through Billing to your tenant.

When entering the lease, you can establish recurring rent bills that the system processes on a periodic basis of your choosing. When processing rent invoices, the system generates transactions with Billing as the transaction destination. Even manual bills, which include adhoc entries, security deposits, operating expense reconciliations, and percent rent sales reports, are sent through Billing with their associated accounting ChartFields, as determined by the transaction routing code setup. You can also send through Billing (first as a negative reversal entry of the originating transaction and then as a new entry for the revised payment amount) any adjustment entries caused by changes in security deposits, operating expense audit adjustments, or percent rent sales reports.

Security deposit refund processing, which is available on receivables lease processing (outside of the lease component) can potentially divert the security deposit refund to Payables if, during lease expiration, the refund has not been depleted by sufficient deductions to cover the remaining amount outstanding and money is owed back to the tenant.

For Receivables leases, the integration points to consider for processing are General Ledger (for straightline accounting), Billing, and Asset Management (for the Asset Repository). Although, for the most part, any adjustment transactions are sent through Billing as negative invoice lines, a Payables integration is also available (and potentially necessary) to handle security deposit refund processing during lease expiration.

See Understanding Transaction Routing Codes.

See Understanding Real Estate Management Accounting Rules.

Process Flow Overview for Creating a Lease

The high-level business process flow for creating a lease consists of these steps:

1. Define the general lease information.

2. Enter the lease timetable and lease administration information.

3. Add the property information.

4. Define the financial terms of a lease.

5. Add base rent.

6. Add the operating expenses.

7. Add miscellaneous rent.

8. Define percent rent information.

9. Enter security deposits.

10. Add lease clauses.

11. Establish options and set critical dates.

12. Add and attach pertinent notes.

13. Define internal and external contacts for the lease.

14. Validate and activate lease.

See Creating Operating Expenses for a Lease, Setting Up Percent Rent Terms, Setting Up Security Deposits, Setting Up Options and Critical Dates.

See Understanding Lease Contacts.

Prerequisites

Before creating leases, you must:

• Set up schedules and calendar IDs.

• Structure lease component setup.

• Set up vendor and customer (landlord and tenant)

See Adding New Vendors, Adding General Customer Information.

See Pages Used to Define Common Journal Definitions.

See Also

Structuring Leases

Common Elements Used in This Chapter

Defining General Lease Information

This section provides an overview of general lease information and discusses how to define general information for a lease.

Understanding General Lease Information

Defining lease terms and property information is the first step in setting up a new lease. You can create a new lease or copy from an existing lease, provided that the lease from which you are copying is not in a cancelled status.

You can associate a one-to-many relationship between a lease and leased properties. For example, a lease can include multiple properties or a single property with multiple floors, areas, or space. To define the property information, populate the property grid. The property summary provides the calculation for total area for all properties listed on the lease.

Note. Once the lease is activated, you must create an amendment to change the property information.

Before you create a lease, you need to understand the underlying actions of some of the fields and how they affect the overall processing of the lease. This section provides an overview of:

• Lease actions.

• Lease statuses.

• Proration method.

Lease Actions

You can specify various actions for a lease. The Action field is dynamic and works in conjunction with the lease Status field, enabling you to change the status of a lease at various stages.

For example, to activate a lease, you select Activate Lease from the Actions field (if you have user authority). Once the lease status is Active, the only available actions are Cancelled, Expired, and Dispute.

The available values are:

• Activate Lease: You can activate leases if all the necessary lease information is correctly entered and validated by the system. Once a lease is activated, you can begin financial processing, make rent payments, and generate invoices. Activation of the lease validates the lease to ensure that all of the data entered is accurate. If errors are encountered, the system provides information for each error. You must correct these errors before you can reactivate the lease.

  Validation errors, when detected, appears in a list towards the top of the page, showing all the errors the system detected. The system also highlights the fields that contain invalid data as a further visual clue. To view and resolve the error, you click the Go to Error link. Errors found on other pages have the Go to Error icon with the page name displayed. Clicking on the icon takes you to the named page.

• Add to My Portfolio: Select to add the lease to your portfolio page. This action is only available if the lease is not currently in your portfolio.

• Cancel Lease: Select to cancel a lease if the lease was entered in error. This action is only available if the lease status is in pending or active status, and the lease does not have any existing financial transactions generated.

• Close Lease: Select to close a lease that has expired and for which all final closing transactions are complete. When a lease is closed, you cannot process anything against it. Before closing a lease, we recommend that you leave a lease in expired status for a period of time to allow for ad-hoc transactions, such as security deposit refunds, final bill payments, end of the year operating expense reconciliations, and so on.

  Note. You may consider keeping the lease in expired status for one year to ensure that all transactions for that lease are completed.

• Copy From Existing Lease: Select to copy from an existing lease. You can copy from another lease only if your lease is in pending status.

• Delete Lease: Select to delete a lease. You must be in update mode and the status of the lease must be pending.

• Dispute Lease: Select to set a lease to dispute. The status of the lease must be in either active or holdover before you can set the status in dispute. Once a lease is in dispute, all financial transactions are put on hold. You cannot process recurring or adhoc transactions until the dispute is resolved.

• Expire Lease: Select to set the lease status to expire. To expire a lease, the status must be active, in dispute, or holdover. Once a lease expires, all recurring rents are no longer automatically generated. However, you can still issue adhoc transactions, such as security deposit refunds, percent rent sales reports, and operating expense reconciliations.

  Note. If a lease, with straightline accounting specified, is manually expired, under straightline accounting rules, the accural/deferral must be written off during the termination period. A one-time adjustment is made to end the General Ledger entry and balance out the lease for all paid amounts.

• Holdover Lease: Select to set a lease to holdover. When the lease is set to holdover, the lease has already expired. You can complete negotiations or enable the tenant to continue to occupy the property for a short time beyond the expiration date. To extend the lease you need to create an amendment. If the lease's termination date is 6 months beyond the date on which the amendment is activated you are given the option to set the lease back into an active state.

• Manage Amendments: Select to create an amendment on the lease or view past amendment history. Creating an amendment changes the terms and conditions of a lease, storing new terms along with historical terms. To create an amendment, the lease cannot be in pending, cancelled, expired, or closed status.

• Resolve Dispute: Select this value once the dispute is resolved. The lease is set to the original status before the dispute.

• Validate Lease Data: Select to validate the lease to ensure that all required fields are populated. Because you can enter the lease in pending status with little required information, the system must perform an extensive validation of all lease data entered to ensure that all of the appropriate entries are correct. During validation, if any errors are encountered, the system provides information on each of them.

  Validation errors, when detected, appears in a list towards the top of the page, showing all the errors the system detected. The system also highlights the fields that contain invalid data as a further visual clue. To view and resolve the error, you click the Go to Error link. Errors found on other pages have the Go to Error icon with the page name displayed. Clicking on the icon takes you to the subsequent pages.

• View Lease Abstract: Select to view the lease abstract. You cannot view the lease abstract if the lease status is cancelled.

Lease Status

The lease status is a system-defined value that provides a visual indicator of the lease status within the lease life cycle. The lease status also controls what processing can occur against the lease. When creating a lease, the status is set to Pending. You can save a lease with only the description; however, you cannot activate the lease until you enter and validate all fields. Use lease amendments to create changes against an active lease.

The available values are:

• Pending: Initial entry point in a lease life cycle. You must enter only the description of the lease. No financial processing occurs at this state. Leases can be set to Activate in the Action field if all the data is complete and successfully validated.

  Note. Manual payments in Payables cannot be processed if the lease is in Cancelled state.

• Active: You can change the status of the lease from pending to active if you have the authority in your user profile to do so. When a lease is activated, financial processing of the lease begins.

• Cancelled: You can cancel a lease in pending or active status if there are no transactions associated with the lease. Once the lease is cancelled, the lease is stored for future reference only.

• Expired: A lease can expire if the end date on the lease lapses. You can choose to stop financial processing, engage in a renewal, or terminate the lease.

• Holdover: You can manually move an expired lease into holdover status if negotiations are in process or the tenant requests an extension for a short period of time to occupy the property beyond the expiration date.

  If the tenant requests an extension, the lease term becomes a month-to-month obligation. To change the status, you must either renew the lease or let the lease expire.

• Dispute: You can put a lease in dispute status if it is in litigation or negotiation. No financial processing occurs until it is resolved.

• Closed: You can close an expired lease. Once a lease is closed, no financial processing can occur. The lease is stored in the system for historical reference only.

As the lease moves through various stages and as the status is updated, it triggers certain events in other areas of the application. Lease statuses determine the financial progress of a lease. Statuses also determine the various actions that you can take on a lease.

This table lists available actions and statuses that you can select for a lease based on the lease's current status listed in the left column:

Proration Method

Real Estate Management enables you to calculate the prorated amount for recurring charges when the start date of the recurring charge does not coincide with the schedule over which the rents are paid. For example, if base rent starts on 1/1/2000 but the schedule for payment is monthly (starting on the 15th each month), the first payment is prorated for the amount for that timeframe between 1/1/2000 and 1/14/2000. At the end of the lease term for that recurring rent, if the end date also do not correspond with the schedule, then the last payment must also be prorated. For example, if the end date is 12/31/2003, proration occurs for 12/15/2003 - 12/31/2003).

Note. In the above example, if the end date is on 12/15/2003, then proration is calculated for one day only.

The proration method applies to all recurring terms of the lease. The proration method defaults onto the lease from the business unit setup and you can change the method as long as the lease is in pending status. Once the lease is activated, the proration method cannot be changed on the lease even through an amendment. The proration method set on the lease at the time of lease activation is used to generate all term schedules. The prorated schedules after lease activation are then stored along with the other financial terms schedules. When you run the transaction generator for issuing invoices or payment, the system picks up the prorated rates.

When a financial term is defined with escalation, the system considers escalation only when the schedule date is greater than or equal to an escalation date. When calculating the prorated amount at end date of the financial term, the system first calculates the term schedule amount including any escalation and related boundaries, and then applies the proration ratio to deduct the prorated amount.

The calculation of the financial term schedule dates and related amounts is essentially the same as for activating a new term as it is for an amendment. The difference is in assessing what constitutes the true start date of the term. When an amendment is activated, the system finds the date of the last schedule generated to the transaction queue, deletes all existing schedules whose date is greater than that last generated date, and if the start date of the amended version of the term is greater than this last generated schedule date, then the new schedule is generated exactly like for a new term with possible application of the proration rule at term start date and term end date. If the start date of the amended version of the term is less than the last generated schedule date, the real start date of the amendment is the first schedule date greater than the last generated schedule date. Proration at start date is not applied but proration for the end date may be applied. If both the start and end dates of the amended term are prior to the last generated schedule date, then no new schedule is generated.

Proration is performed only for schedules with a monthly frequency. Monthly frequencies are those that have each month of the twelve months selected on the Schedule component.

Note. Some schedules appear as monthly but do not have each month of the twelve months selected. For example, quarterly frequencies appear as monthly but are not truly monthly for proration purposes. If you select a monthly schedule that is not truly monthly and the lease setup indicates to perform proration, a warning statement is issued to inform you that proration did not occur.

Pages Used to Define General Information

Defining General Information

Access the Create New Lease - General Information page.

Note. This page displays an example of validation and/or activation errors the system detected. To view and resolve the error, click the Go to Error link. Resolve by entering or replacing the values highlighted in red.

Lease Timetable

Lease Administration

Property Information

Property List

Defining Lease Financial Terms

This section provides an overview of the lease financial terms and discusses how to:

• Define financial terms.

• Add base rent

• Add miscellaneous rent.

Understanding Lease Financial Terms

Setting up the financial terms on a lease is critical to the overall processing of the lease. You can define the billing or payment frequency of rent, operating expenses, and miscellaneous rent. Establish recurring payments or invoices and specify the specific date that payments or invoices should be processed.

You can establish rent escalations that increase at specific date intervals throughout the life cycle of the lease. When adding base rent, you can set up a recurring invoice or payment. You can create rent escalations using a predefined index or standard stepped increase. The index escalation method typically can use the Consumer Price Index (CPI) or any other index to help determine the rent increase. Escalations usually occur on an annual basis with an optional defined maximum limit capacity.

With operating expenses, you can set maximum increases by amount or percent. As a tenant, you can audit those expenses annually to ensure continuity of spending. As a landlord, you can reconcile the operating expenses and bill or credit the difference to your tenants.

You can also set up a recurring schedule for miscellaneous rent. Recurring miscellaneous rent can include such items as monthly parking fees, administrative fees, and storage fees. You can establish a recurring schedule to reduce data entry redundancy.

You may have leases that are set up on a percent rent schedule, where the monthly rent is reduced in exchange for a portion of the tenant’s sales. With percent rent schedule, you can upload tenant sales reports to determine the variable monthly rent the tenant pays.

See Setting Up and Calculating Percent Rent.

Pages Used to Define Financial Terms

Define Financial Terms

Access the Create New Lease - Financial Terms page.

Financial Summary

Schedule of Recurring Rent

Adding Base Rent

Access the Financial Terms - Base Rent Details page

Schedule

Select a value to specify how frequently rent transactions are generated. If the start and end date of the selected frequency differ from the start and end date of the base rent transaction, the system can optionally calculate a prorated transaction for the beginning and end of the term. The values that you have to select from, such as Monthly and Weekly, come from the Schedule component. See Understanding General Lease Information.

Rent Escalation

Real Estate Management enables you to establish a lease with a base rent and rent escalations using two different calculation methods: stepped or index. The stepped method refers to setting up static increases in the rent at set dates, while the index method is based on the CPI or any other indexes that you define. By selecting these fields, you can establish the maximum amount or percentage that the base rent can escalate. Usually on a monthly basis, you can update the actual index values when the index reporting authorities change the values, thus affecting the variable index escalation.

The system calculates the escalation starting with the base rent amount that is valid for the date the calculation is being run. Then searches for any escalations on this base rent row. Then the system takes the most recent non-future row based on the escalation date, which provides which index to use. Lastly, the base rent amount is added to the percentage value of the index (Base Rent + (Base Rent*Index)). If the escalation (Base Rent*Index) exceeds the minimum and maximum specified for that row, then substitute those values (use Minimum if it has not been reached, use Maximum if it has been exceeded).

Rent Escalation Schedule – Escalation Type: Index

When you select Index in the Escalation Type field, define the following fields:

Rent Escalation Schedule – Escalation Type: Stepped

The stepped method enables you to establish multiple rent escalations throughout the life cycle of the lease. You can insert multiple rows of data. Upon the new start date, the new rent amount becomes the effective date. The escalation amount is added to the base rent upon the new start date; the escalation amount is not cumulative.

For example, the base rent is $5000.00, and the stepped rent escalations for 5 years is set at $500.00 per year. To set up the rent escalation schedule, you insert 5 rows: the first row escalation amount is $500.00; the second row beginning the second year is $1000.00 (first year $500.00 + second year $500.00 = second year escalation amount $1000.00); the third year, the amount is $1500.00; and so on (see table below).

Here's an example of a stepped rent escalation (base rent = $5000.00, rent increase $500.00 per year for 5 years):

Warning! The Escalation Amount is not cumulative. You must adjust the amount incrementally for every year.

When you select Stepped in the Escalation Type field, define the following fields:

Escalation Amount

Enter the fixed escalation amount for base rent.

Defining Lease Clauses

This section provides an overview of lease clauses, lists a prerequisite, and discusses how to define lease clauses.

Understanding Lease Clauses

A lease agreement contains an enormous amount of data that is relevant to the lease administrator, such as financial terms, special clauses, options, and legal terms. Because of the numerous varieties of data, efficient capture of these important terms is difficult.

Lease clauses typically represent legal terms in the lease agreement that provide certain rights to either the tenant or the landlord. You must keep this information easily accessible because you are likely to refer to it frequently over the course of the lease. Although clauses are meant to capture all of your lease agreement information not otherwise stored in Lease Administration, there is no processing on any of the data that you enter here. It is provided for reporting purposes. Changes to a clause or additional clauses on an active lease require an amendment.

With lease clauses, you can select the clause types and clause sub types to capture and track this information and enter additional related information in a free-form text field. Clause types and sub types enable you to reduce data entry redundancy and also logically categorize the information that you capture. For example, if you have a clause type of Parking and a clause sub type of Allocated Spaces, you can further define the clause with the actual number of parking spaces allocated to the lease. You can also incorporate specific sections of a lease in the Reference field for each clause that you enter, enabling quick reference to the actual terms within a lease.

Note. User defined fields appear on this page to capture additional information unique to your organization. You must first set up these field in the setup component.

See Understanding User Defined Fields.

Prerequisite

Before adding lease clauses, you must set up the clause types.

See Defining Clause Types.

Pages Used to Define Lease Clauses

Define Lease Clauses

Access the Clauses page.

Clause Type	Click the link under Clause Type to display the clause details previously defined in lease maintenance.
User Defined Fields	Enter the data you want captured for reporting purposes. These fields are defined during implementation to enable you to capture additional information specific to your organization. See Understanding User Defined Fields.

Add Clause Details

Access the Clauses - Clause Details page.

Clause Type and Clause Subtype

Enter the clause type and subtype. You can select only the subtype associated with the clause type that you define. Note. The clause type and clause subtype has a parent-child relationship. You cannot enter a clause subtype without first entering a clause type.

Adding Notes and Attachments

Over the life of a lease, there may be many conversations and correspondences that relate to the lease. The Notes tab within the lease provides a mechanism to record activity history on this lease, similar to a call log. You can record notes at anytime against a lease, except when the lease is cancelled or closed . When adding notes, you can optionally attach files into the database. You can use this feature to attach a soft copy of the lease agreement itself, an amendment, and other related documentation. Once a note is saved it cannot be amended.

This section discusses how to add notes and attachments to a lease.

Pages Used to Add Notes and Attachments

Add Notes and Attachments

Access the Notes page.

Search for Notes

You can add new notes to a lease or use the Search for Notes group box to locate a specific note already recorded against this lease. This is because over the life of a lease there is a chance that there could be hundreds of notes recorded.

Note. You cannot use the search fields when creating a new lease.

Notes Group Box

Displays notes that you entered throughout the lease life cycle. You can only view the list of notes previously created.

Add Note Details

Access the Notes - Note Detail page.

Load Attachment

Click this button to upload documents, letters, or drawings associated with this note. Once an attachment is loaded you can delete it or view it. See Defining an FTP Server for Document Attachments.

Reviewing Basic Lease Information

This section discusses how to perform lease inquiries.

Real Estate Management provides a simple online inquiry page of basic lease information for a bird's-eye-view of a lease. This inquiry page provides you with a summary of the lease terms and financial summary of that lease.

Pages Used to Review Basic Lease Inquiries

Inquire a Lease

Access the Lease Inquiry page.

Managing My Lease Portfolio

This section discusses how to manage my lease portfolio.

Real Estate Management provides a personalized page for viewing all leases assigned to you, as lease administrator or portfolio manager. You can add additional leases, not assigned to you, to your portfolio by clicking on the Add to My Portfolio link.

Page Used to Manage My Lease Portfolio

Managing My Lease Portfolio

Access My Lease Portfolio page.

Add to My Lease Portfolio	Click to add additional leases to your portfolio. You can add additional leases that are not assigned to you to your portfolio to help in managing workload for the other lease administrators or portfolio managers.
Remove from My Lease Portfolio	Click to remove a selected lease from your portfolio. Note. You cannot remove a lease from your portfolio if you are named the Lease Administrator or Portfolio Manager on the lease.

Adding Leases to My Portfolio

Access the Add to My Portfolio page.