Workplace 2.0 Summit: Lease in a Post-Pandemic Environment

Bart Waldeck:  

Let’s jump into the Roundtable lease in a post pandemic environment. We have a great set of guests from several leading organizations including Cushman and Wakefield, Jackson Cross Partners in RSM and our very own Rick Zelinsky will moderate the discussion. So Rick, I will turn the reins over to you.

Rick Zelinsky:

Thanks so much, Bart. And with that, I would ask for our attendees or our participants to please go ahead and do some introductions, Brett, if you would.

Brett Abrams:

My name is Brett Abrams. I’m the Global Head of portfolio administration with Cushman and Wakefield. I’ve been at Cushman for about eight years, and located at our headquarter city of Chicago.

Lou Battagliese:           

I’m Lou Battagliese. I am a partner here at Jackson Cross Partners based outside of Philadelphia. And we have been doing advisory work and corporate strategy work for the last 20 years and happy to be here today.

Kristin McLaughlin:

I’m Kristin McLaughlin. I’m a partner with RSM and our technical accounting consulting group. So I’m located in Detroit. And for the past, I’d say three, four years, I’ve been working with clients to implement ASC 842, and deal with their complex lease accounting questions. So look forward to talking to you guys today.

Rick:

Sounds great. And to complete the introductions. I’m Rick Zelinsky. I’m with the Tango and in our Product Strategy Group. I’ve been in the lease administration and accounting technology for about the last 26 years. And look forward to moderating this session today.

So let’s go ahead and dig in. And I think for the purpose of today’s discussions, we have some broad trends that we’re going to talk about and have some specific topics within those and see where the discussion goes and certainly look forward to participant feedback as well.

So kind of leading up to this roundtable, I’ve probably spoken with dozens, and across the four of us, we’ve probably spoken with hundreds of companies as they’ve navigated through the pandemic, and specifically what it’s meant from a lease administration, lease management standpoint, I think what we’ve seen is some of these discussions have kind of shifted quite a bit over the last year, from kind of an initial focus on what rights a tenant may have to just paying rent or not paying rent or partial payments of rent. And it started there and it kind of grew through negotiations, and just this kind of whole time of uncertainty. But I think we feel like we’ve kind of turned the corner a bit. And now companies are kind of grappling with a new set of challenges.

So to that degree, and to kind of start our discussion, I’d like to kind of talk about some of the trends that some of you have kind of seen in the marketplace relative to lease administration, in accounting, since the start of the pandemic. So, Lou, if I could kind of call on you first. What are you seeing in this particular area?

Lou:    

Sure. I think the earlier sessions today really highlighted a lot of folks focused on workplace and where people work, how they work, and I think today we’re going to talk about a lot of the underlying, what is actually doable based on leases and how things are being done. The pandemic came on the heels of a little bit of fatigue for the major public companies getting ready for the lease accounting transition. And one of the big trends that we’ve talked about with clients and others is that there was an aspirational goal of a single system of truth, a cross functional team to put everything together, and everybody working out of the same set of data and information.

And what the pandemic seem to disrupt was that process. When everyone was sent home, when people had to adjust their businesses or their headcounts, it was like everyone went back to their corners. And what was originally dreamed of as kind of a coherent strategy on lease management, lease accounting, turned back into the silos of people using multiple solutions. And so what we’ve seen recently, since the beginning of this year, actually, is the people dusting off the playbook and the plan to start to go back because after a year of doing the lease accounting, and after a year of the disruption in the workforce, people are starting to say, how do we get this fixed? The labor every quarter to keep lease accounting current, and all of the changes that are happening within our lease portfolio need to be managed better. And I think that people are beginning to look at alternative solutions to handle this.

Rick:

Sounds good. Kristin, any thoughts in this regard, from an accounting perspective?

Kristin:

No, I think Lou is spot on. And from an accounting perspective early on people, although we see this as a compliance exercise thought, I need to take advantage of the time and investment that I’m going to have in a lease accounting system to get that single version of truth. And I think you’re right, I think there was some disruption. But now I think there’s definitely focus on getting those systems aligned. And we’re now working with a lot of private companies, because they’re not required to adopt until calendar year 1/1/22. So they were just sitting in a great position to learn all of the lessons from the public companies and get those solutions’ kind of aligned and up and running. So I think there’s a lot of benefits for the private companies in the space. And they’re looking to capitalize on that.

Rick:

Got you. Okay, and Brett, any kind of similarities or differences from Lou and Kristin?

Brett:

Will echo what Lou and Kristen said, but my overarching theme is probably never been a more complicated time to be a head of real estate at any private or public company. It was hard enough with ASC 842 coming up for private companies, a deadline that had been delayed a number of times because of how complex it was. You add in COVID, you add in a bunch of turnover and leases. And now everyone is focused on returning to work as well. And it feels like it’s all being crammed into these last six months, or the next 12 months of the year. And it’s just a really, really tough time to have that roll with all the complexity and all the different areas that you’re managing. So what we’ve seen is just the need for good partnership, the need for flexibility, but there’s a lot of pieces of this puzzle that have to come together to be successful.

Rick:

I’m sure some of our participants are kind of shaking their head dealing with those challenges. Brett, perhaps given that your business is kind of front and center on the outsourcing, what can you share around outsourcing in general, any of the trends there? Are you seeing any kind of deviations from what we’ve seen in the past?

Brett:

Yeah, we’ve seen a huge uptick. I think, as clients have gone through this, and especially through the first probably three to six months of COVID. A lot of clients went through and question what things do we want to keep in-house? What things do we want to work with a provider on just as part of basic business continuity planning, specifically on the lease admin and lease accounting side, whereas over the past five, 10 years, a lot of times have tried to keep it in-house. When you add in the complexity of lease accounting, when you add in the global pandemic, they’ve turned to us or our competitors to say this is just not a service we want to continue managing. We think someone with lease accounting expertise, with system expertise, with technical expertise, and especially with global expertise, might do a better job at this and trying to keep this as a core competency. So we’ve probably never been busier. We’ve seen more uptick in RFPs and activity, especially over the last six to 12 months than we’ve ever had on the lease admin side.

Rick:

Got you. I guess Kristin, given that your focus is more on the accounting, are we seeing kind of similar trends on the accounting elements of this from an outsourced provider perspective as well?

Kristin:

Definitely, I think as people have gone to the implementation, and a lot of the larger companies have elected to use a partner to help them get there, they’ve taken a step back and said, well, typically, I would do all of this myself, I don’t really want to, they understand it’s more complex than they thought there’s a lot more data to manage. And it’s a hard pill from their employees to get employees trained in that role, and you do need to have a certain volume of activity to make it worthwhile. So we’re definitely starting to see an uptick in the outsourcing from an accounting perspective, as well, for all that Brent mentioned.

Rick:

Thanks for that. And I think that’s kind of some of the operational needs, but if we kind of zoom out, and we think about kind of portfolio planning and analysis and strategy, this obviously got way more complicated with COVID, as well, Lou, anything to share here in terms of the portfolio planning process, and the role of data and analytics in that regard?

Lou:

Yeah, there was an initial benefit. And I think that most people are seeing that the accounting project getting ready for 842 or IFRS 16, forced a stronger view on data quality, and the core information that was built, just simple things like locations, and the correct dates and options and critical dates along that line, improved in that process. Where it fell a little bit short, was that most people did view it as a compliance project, and certainly towards the end, accounting was taking the lead. So there was less rigor put on the supporting data space management, or clauses like when we discussed in one of the earlier podcasts, illegal clauses related to a pandemic, force majeure, those things which were not part of the scope when people were trying to stand up and get to compliance.

So I think people now understand that there is a place for this. But I mentioned earlier that there’s a little bit of reluctance, or inability to find budget or time to build the data. And I think that the space changes, the lease changes that are coming, are going to drive people more and more to use that because they do have a good data set, at least at a foundational level, but not enough metrics in detail to do the full on portfolio planning and analytics that they do across other parts of their business.

Rick:

And Lou, I could just from my own personal experience, kind of working with our clients, I think what we found is that strategy is kind of front and center, and is something that organizations are appreciating the value of putting more time into it. Certainly, the uncertainty that was created via the pandemic kind of got people to kind of rethink through this process, Brett, is this something that you’re seeing from a kind of global occupier services type organization that the broader strategy is something also that companies are more focused on?

Brett:

There’s no question about it. And it all starts with the data that we’re capturing sort of on the onset. So the data matrix that we use for lease administration has grown tremendously over the past two or three years, as IFRS has come into play as COVID, global components. We’re just capturing more data. And when you capture more data, there’s actually more data that you can put against it. There’s more labor and analytics data, there’s more portfolio comps data, and I think most real estate organizations are trying to get more sophisticated, and bring in that level of rigor to every decision that they make. So there’s no question that third party data and that portfolio analytics data is playing a key role in almost all of our clients decision making.

Rick:

Makes sense. And I think you touched on this a couple moments ago, from a perspective of global I think this too, is something given that the Tango solution is one that’s deployed in hundreds of countries. And as we enter into new agreements with new organizations, we find more global presence. Organizations are cross borders, dealing with more complex accounting, whatnot. Are you also seeing this in terms of the types of organizations that you’re dealing with and their portfolio in general that global and just internationalization is a broader trend as well?

Brett:

We’re seeing almost nothing come in that doesn’t have at least some global component to it. So whereas a couple years ago, you might have had just a couple of key stakeholders. Now you add in a lot of regionalization, and globalization, there’s IFRS and ASC that is causing lease accounting. All of a sudden, instead of two or three stakeholders, you’ve got 15, 20 stakeholders on any given implementation. It’s making implementations harder, it’s causing more coordination. But the truth is, most of our clients have just created some sort of global presence, whether that’s offshoring a component of their labor force, whether it’s having their industrial locations offshore. There’s more globalization than we’ve ever seen and it’s certainly making it more complex to implement all the different things in the municipalities, states, countries, et cetera, to make the lease admin that single source of truth.

Rick:

Yeah, and I would suspect, Kristin, you’re kind of seeing similar things where you have multi national, global organizations that now have presence in entities in different countries. So some may have local regulatory reporting, some IFRS, some FASB, are you kind of seeing this as well, that there’s also some complexity being added kind of along the way?

Kristin:

Completely. And when you think of global leases, and you have to deal with all sorts of foreign languages, so a US company, they can’t read a lease in Mandarin, they can’t read a lease in Polish. So how are they going to get comfortable with that data? We have unique leasing structures that are really commonplace, like in the UK, they have 99 year leases, we have a lot of clients, what do we do for classification? How do we get a borrowing rate for a 99 year lease? We have clients that have leases on Scottish quarters, which before 842, I never have even heard of a Scottish quarter. But when they’re looking at a system, could the system handle the accounting with Scottish quarter payments?

Returning properties in a white box, that’s very common in Europe, not common in the US. How does that impact the accounting? So all of these things that seem really simple, when you add it all up, it makes it a lot more complicated, coupled with all of the different statutory and compliance that they have. So it’s fairly daunting for these companies.

Rick:

Yeah, that’s really interesting. And in general, I think on the topic of the trends, so it sounds like it’s gaining complexity, it’s gaining a global scale, while some of the nuances of the immediate problems that companies were dealing with in April, May, June of last year, are now kind of have passed us, it seems like it’s really kind of taken hold, and really kind of reshaped this business.

So with that, let’s go into kind of our next topic, around negotiations. And I think we’ve talked about some of these trends, and kind of what surfaced as a part of the pandemic. But this is not an area we can ignore. Because I think companies kind of learned, some of them the hard way of what they’re willing to pay for, in order to kind of minimize exposure to increase flexibility, or perhaps both.

And as you know, those of you that are familiar with lease negotiations, everything kind of comes at a cost. It may not be an economic costs, but it could be a language cost, and a flexibility cost. I guess if we kind of break this down a little bit, and let’s maybe start with renewals, because I think that’s obviously a common item that’s referenced in many leases. Brett, anything happened in terms of how leases are being negotiated in the context of renewals?

Brett:

Yeah, I would say there’s two themes that we’re seeing. Number one is obviously complexity. COVID threw us into a loop, I like to call it the lawyer red line Olympics, where we are seeing just more complexity and leases than we’ve ever seen. Whether it’s force majeure clauses or sanitation and maintenance or global pandemic clauses that are going into these leases, they’re just getting more and more complex. With that complexity, there’s a need to refine what we’re capturing and system and what we are providing in our reports to our clients. So that’s number one.

Number two, is that almost all of our occupiers are looking for increased flexibility. That’s sort of table stakes at this point, even more than rent, rent decreases, what we are seeing in the 15 to 25% rate. Clients are really trying to figure out how can we build in the most amount of flexibility, acknowledging there’s probably not going to be another COVID hopefully in our lifetime, but there probably will be another global event where we need to be flexible, we need to be able to change course quickly. So that’s what we are seeing a lot on the occupier side.

Rick:

Got you. And then Lou, anything, any thoughts you have relative to options specifically?

Lou:

I think that there are a couple of things that we talked about. From an option standpoint, options were built in so that folks could control the space, right and have some leverage depending on where the market goes, they may or may not exercise. But as Brett was just talking about the turnover in what people need for space, what space looks like, it certainly will vary by space type. Offices has been the topic of the day about workplace, but manufacturing and distribution space is all being configured differently. And so it reopens almost every negotiation, and where a company might had 15 or 20% of their leases rolling that they had to deal with on an annualized basis for renewals, whether direct negotiation or just exercising options. Now almost everything’s in play.

And trying to align the terms of the lease, the leverage that you may have, or may not have, the landlord situation regarding other spaces in the buildings or their portfolio, it is significantly more complex. And most of all, it just takes longer. And I think setting expectations for non real estate people in the organizations. When the C suite says this is our plan, we’re going to cut headcount by X, we’re going to reduce rooftops by Y, and then you have to look at your portfolio and realize you don’t have the leverage to get X and Y done. It makes it a challenging time.

Rick:

And I guess expanding on that a bit, Lou, I think as you mentioned, companies put a lot of effort into negotiating options, renewals specifically, probably most commonly. I think now it seems like that probably holds less value to them, or I guess to kind of expand on this, are you seeing that clients are now renegotiating leases completely, or having a different need for those options or different types of options?

Lou:

Assuming that your space is changing, right, then your options are almost worthless. Again, unless you have some kind of really advantageous terms, or you have some latitude within the options to step down or increase space or reconfigure, the idea that six months or 12 months in advance, especially if it’s less than 12 months, that you are going to be able to negotiate and relocate any type of major location is going to be very difficult.

And we read and hear about, I have talked to clients about people who are looking at consolidating rooftops, creating shared spaces, eliminating certain locations. In those cases, your options don’t do you a lot of good and the best advice that we can give to the clients is start sooner, don’t manage to expiration’s, right? Anything that’s expiring this year is a red flag and you have to get on that right away to know where you are. But you really should be 18 months or two years out in your planning cycle so that you can know that you have the ability if you have to pick up and leave, that you have those options and you can’t get held against the wall in a negotiation.

Rick:

Got you. And then Kristin, perhaps kind of an accounting viewpoint of that, those options often are ones that are kind of considered perhaps as part of the likely term. Are you seeing some trends there or some changes in terms of that process?

Kristin:

When we were walking through the different situations, and all of those complications that are encountered in a lease, while they’re complicated from a negotiation perspective, they all have accounting consequences. So if we’re going to abandon space, we have to think about the accounting for that, if we know we’re going to extend options, that impacts the accounting. So while all of this has business implications, there’s accounting consequences that have to be considered and they can often be fairly complex.

Rick:

I see. And Brett, anything to add on the option front?

Brett:

Just that there’s a lot more out there. And they’re being built in a more complex way to build in that flexibility. And right now, given the current market, a lot of owners are giving that as a concession in exchange for keeping rent around market rate. So I expect that to continue probably not that much longer, maybe another six to 12 months. But we are seeing it pretty, pretty heavily.

Rick:

I see. And I know you mentioned a couple key lease provisions, things like force majeure, which in my kind of research, it’s kind of varied by municipality in terms of tenants have actually gotten relief as a result of that I think different states have ruled on this in different ways. As an example, you mentioned sanitation, what are you seeing, from a perspective of lease language, Brett, in terms of where tenants are going with this or where landlords are going?

Brett:

Yeah, it’s all over the board. And it certainly varies municipality, state, et cetera, different types of space. I think the one thing that we are consistently seeing is much heavier reliance on sanitation, and maintenance within these leases. The level of service, what sort of TI is going to go into this, what sort of new technologies are going to go into the sanitation and maintenance of space has become a very hot topic as it comes to leases because the technology is catching up so quickly, compared to how quickly the COVID came out. And we’re seeing brand new technologies that clients are expecting to have in their space as sort of table stakes. So there’s a lot of language there.

Obviously, there’s going to be articles written about force majeure, and the effect of that from last year well into the future. And then again, the complication of all these different options, we’re seeing more complexity and a lot of this language.

Rick:

Lou, would you would you echo those thoughts?

Lou:

Yeah, I would agree with Brett, the force majeure, really, in most leases, is a landlord relief from delivery. By very, very few leases prior to the pandemic, did you see a force majeure as a relief for the tenant not to pay rent. And I think that when it happened, everyone was scrambling, looking for any way, when you have a vacant office building to stop paying rent. But the reality is, to Brett’s point, it’s part of the entire negotiation. From read to term, to the other flexibility options that tenant met or an occupier may want, the question of who bears risk, maybe people will start to insure over it, which would be a way to share the risk. But I’m not sure that there’s any common area of agreement as to if something like this happens again, should the landlords absorb all that or should the tenants?

Rick:

And Lou, I guess kind of building on that, I think it’s always been probably more commonly a bit of an adversarial relationship between landlords and tenants. And they’re negotiating against each other trying to kind of land in the best place. I know, in the specifics with many of the major landlords, there’s a lot of debt service. And obviously, revenue down is a dramatic event for them, are we seeing anything kind of change in terms of the relationship between tenants and landlords that’s kind of transpired?

Lou:

Our experiences, it really falls into two camps. A lot of the larger and smaller landlords were have been pretty accommodating and willing to work with the tenants in an open handed way. Let’s try and figure out a win win, which was where a lot of negotiations were going prior to COVID. I think based on pressure of other things going on. We’ve also seen a number of landlords just take a hard line, particularly with the higher credit tenants, right, they knew they were going to take their hit with the smaller businesses, lower credit, unrated credit or the kind of operations that had no revenue, and we’re going to go out of business, but they took a much stronger line with the larger tenants and clients who they knew could pay and they worked with them or they again, tried to come up with some short term accommodations, but for the most part, they drove pretty hard bargain on the rents due, you need to pay it.

And so I think going forward, it’s going to depend on vacancy, it’s going to depend on what market you’re in, the type of space, all the variables that Brett alluded to, I think are going to come into play. But there’s also the personality of the people who are making the deals, which has put a little bit more personality into it. If someone’s a hard line person, they don’t seem to be softening.

Rick:

Yeah. And I think, Lou, at least from my discussion with both the smaller and large organizations, it seems that those larger organizations have always kind of expected, kind of getting treated to a different, kind of from a different set of expectations than some of the smaller tenants, as you spoke to, I think, a little bit, I think even some of these larger companies have been surprised by the landlord kind of digging in on some of the financial terms as an example. Brett, are you kind of seeing the same that Lou has spoken to here that there’s kind of less, it’s not as kind of cut and dried as it was in the past?

Brett:

Yeah, I think the winds are changing a little bit. I looked at my LinkedIn feed this morning, I think the first five articles were, Apple coming back three days a week, and this company coming back two days a week. And whereas for the last year, landlords were really obviously being conciliatory and trying to keep good tenants because they obviously needed the cash flow. I actually think a lot of the occupiers that are coming back now has sort of changed the demand curve relatively quickly. And landlords are still digging in, again, to good credit tenants, because the demand is there to get their people back to the office, even if it’s not 100%, even if there’s still work from home component, which I think every company is going to have.

So for the last 12 months, I would have told you, yeah, landlords are running for the hills and trying to protect their good tenants. But it’s amazing just how quickly it’s changing, even in a matter of weeks, as to how quickly landlords seem to be a little bit back in the driver’s seat. And the war for talent coming back and full fold with space and amenities being a key component to that.

Rick:

Yeah, and I think kind of building on that Brett, and you kind of are already kind of getting to kind of the next question I was going to ask, which is really around kind of who’s in the driver’s seat? Lou, what are you seeing relative to? Are we seeing kind of a shift of balance here? Do we think some of these things now with the flexibility that tenants are wanting, in turn, the landlords can kind of use that to their advantage? What are you seeing in this regard?

Lou:

I think it’ll vary by landlord and it’ll vary in the market and the type of space particularly if the reworking of spaces required, then somebody needs to come up with the capital. And if an occupier company is trying to do this in 50 locations, then they are going to look to the landlords, the better heeled landlords who have the ability to finance the improvements in exchange for term and credit to do that. So I think, though, if there is a tide shifting on driver’s seat, I think the better heeled, larger landlords, the rich, the folks that own and have capital available to make deals are going to be in a better position than smaller, independent landlords.

And I think that from a landlord tenant standpoint, it’s going to depend on market, right? If I’m in a market where there’s only one good choice or two good choices, then I don’t have a lot of leverage. But if I’m in a market where there’s been some vacancy, some sublease space, it has increased, or other things that I can work with, then the tenant has a little bit more leverage, assuming that they’re going to have to relocate or move.

Rick:

Understood. And, Brett, I mean, from a kind of localization, regionalization, country bait, are you seeing something similar to I know, there’s organizations that are kind of pulling out of high rent areas moving into secondary markets, we have expansion, as we talked about kind of overseas, is this something that there is some specific trend towards where the tenants position, where the landlord’s position who’s in the driver’s seat or is it kind of really vary based on even the local markets?

Brett:

Yeah, you’re seeing a lot of variation. What I will tell you is that prior to COVID, especially outside of the United States, landlords were really in the driver’s seat. They held almost all controls, very little audit rights, et cetera. We are seeing a little bit more traction in in non US markets where tenants are getting a little bit more traction in terms of their space and their needs, and especially good credit tenants. Because obviously, there were so many that went under during COVID. But no, it’s really varying by market, it’s varying by company and organization, what I will say is that the war for talent has not changed, it is still all about, where can I get the best people into my organization, and there’s a lot more flexibility now that companies are able to provide their employees. So your address, your current home address doesn’t matter nearly as much as it might have used to. Your talent is really what’s going to differentiate and shine through. So we’re really seeing it vary all over the place.

Rick:

Sounds good. And I think that’s something we’re experiencing kind of in this suite of our products and our customers with where they’re getting space. And to your point, the more of the work for a home provides some flexibility to have less offices and kind of those major kind of high rent areas.

So let’s go ahead and transition a bit into our kind of next topic, which is really around focusing around some of the accounting implications. I feel like the public companies were just starting to settle in, after adopting 842 and IFRS 16. And the private companies, we’re kind of just getting underway with the process, and then bam, the pandemic hits. And the accounting and finance organizations are disrupted to a degree. And I remember vividly a lot of the discussions I had with our customers, that they’re kind of number one focus was on payment of rent or partial payment of rent, and basically, said things to the effect of, we’ll deal with the accounting later, just because the cash flow and other short term priorities were what was important to them.

So, clearly, I think, Kristin, as you mentioned early on, some of the accounting impacts have kind of already passed now that we’re a year plus into this, but are there any kind of big ticket items that organizations are kind of going through from an accounting perspective now?

Kristin:

I mean, one of the things we saw, which was kind of a bit of an unusual kind of COVID concession was they would defer rent payments, but then they would tack on an 8%, uptick further on down line and the cash flow stream, so have to think about the accounting for that, and that’s going to impact you for a long time. So does that really free run, isn’t really a financing of rent? How do you treat that?

We’ve had a lot of a lot of companies that got a couple of months of free rent, and they packed it on at the end. So how does that affect the cash flow? So, while they were short term impacts, there was longer term kind of accounting implications that will kind of take them through the end of their lease term.

Rick:

Right. And I think those are things people are kind of sorting out, settling in, in terms of is it a modification event? Is it same amount of rent over the same period of time or different period of time? And, obviously, all the gyrations and nuance as to the accounting of that, but what’s happening today? Are we seeing anything in terms of items, like leases becoming impaired being more common, or inclusion or exclusion of some of these likely renewal, what constitutes the likely term?

Kristin McLaugh…:

Yeah, it’s funny you say that, so that was started to see a lot more uptick and clients reaching out to us to talk about impairment, because leases have never been on the balance sheet. So there’s never been part of any accounting impairment model. So now, we need to look at that. I mean the lease accounting theory, not to get into all the nitty gritty, defines individual lease components. So you might be leasing a building, maybe it’s six floors. And you decide you only need four floors. So, you have impairment on those remaining two floors. And how do you define that unit of account? And how do you do your cash flow testing to determine the impairment? And do you need to factor in potential sublease income?

So all of those issues related to impairment adds a lot of complexity. So we have a lot of clients that are really thinking about impairments. And then the reasonably starting to renew options or exercise to early termination. Adoption gave us some carryover provisions that a lot of clients took where they didn’t really reevaluate their lease term. But now with changes in facts and circumstances, if you are aware that you’re going to exercise in early termination, you need to take into account the effects of that when you’re thinking through the accounting. There continues to be a lot of accounting complexity as we navigate these day to accounting challenges.

Rick:

Yeah, if we would have rewound two years ago, I would have thought, what could be more complicated than just implementing and sustaining 842 and IFRS and here we are. Lou, are you probably seeing the same thing from a perspective of the level of kind of accounting complexity is grown substantially?

Lou:    

t has. The interesting thing with Kristin’s comments and not to reflect on Tango or any other systems. But the systems that were built for the lease admin and lease accounting were kind of built from the ground up standpoint. They weren’t always designed for ease of use when you have to go back and make adjustments or deal with impairments. So there’s a technical aspect, this goes to Brett’s point about why folks are doing some outsourcing. But one of the other accounting impacts or P&L impacts that we’ve seen is that a lot of companies over the last three, four or five years invested huge amounts of money in FF&E and tenant improvements to design the new workspace of the future with work benches, with people sitting across from each other, and next to each other, and only 120 square feet per person. And now, if you then go and tear that out and re position the space, there’s probably some write off of FF&E, or other things that need to get reclassified.

So everything that we’ve talked about, and I think this is what Kristin was reinforcing, has some type of impact on accounting, which is, if nothing else, it’s a complex series of decisions and work to get it to foot. And then it also is the impact of whether it includes any kind of P&L impact or balance sheet impact or impairment. So it is definitely a complex time with all these moving pieces.

Rick:

And then, I think organizations historically, at least kind of going back a decade, would have really kind of treated lease administration and lease kind of financial management, lease accounting, kind of separately, in many organizations. So there was kind of a group that would be abstracting leases, managing the terms, perhaps paying rent, and then everything kind of downstream from an accounting perspective, would be done by the accounting team. I think that really resonated even further in that direction when FASB in IFRS, was introduced, because it just became that much more complicated. But in the same respect, it did cause those two teams to kind of work more hand in hand, because one change from one group had an impact to the other group.

Brett, from a perspective of like centralization versus decentralization, is there anything that you’ve seen kind of trend with accounting versus administration?

Brett:

Yeah, I would say that there’s less centralization across the board, more stakeholders, you’re seeing geographic stakeholders, you’re seeing accounting leads, you’re seeing real estate leads, controllership, et cetera. There’s just more stakeholders in almost every one of our clients, we are so rarely in a position where there’s like one or two stakeholders, it’s normally starting with six and going all the way up to 20. And that’s okay, that’s sort of the complexity of the business nature today, given how many stakeholders are relying on the real estate data. But it’s certainly a change as we’re thinking about how we implement these solutions for our clients.

Rick:

Yeah, understood. And Lou, I think, are you seeing the same kind of trend that there’s kind of decentralization is not uncommon?

Lou:

Definitely. You were talking earlier about the international component. The lot of US based corporations, the US folks really didn’t know anybody internationally, for they didn’t deal with them. And country by country, they have different business groups. They have different people, the decisions on leasing, whether it was real estate or assets, or made a lot of times at an operational level, and everything just rolled up to rent expense in the GL. So I think the complexity now as real estate people, we never realized how much time accountants spent on month end closes doing adjusting entries, right?

And now when these systems are pushing out the journal entries for a month end close and they don’t sync up because they haven’t yet integrated with the ERP or for other reasons. There is this flurry of activity to get changes in before the month end close or the quarter end close to make sure that things sync up. And I think that is what’s driving, the outsourcing that Brett talks about is that there’s going to be a fatigue, at some point with this was folks just don’t have enough manpower to get all this caught up.

Rick:

So it sounds like more work shorter period of time, which then kind of doesn’t bode well for having these things’ kind of managed within their teams. I think that the system replacements I think from our experience, we’ve seen an extraordinary kind of uptick in system replacements. Obviously, some of those were driven, specifically based out of the FASB standards. But I think, shockingly, I don’t think we’ve seen that trend kind of subsided on I think, Kristin, what are you seeing from a perspective of lease accounting solutions, where companies would go in maybe focus just on that? Are you seeing that expanding into some of the administration side? Or what are you seeing from a perspective of the system replacements or adoption?

Kristin:

Yeah, we’re definitely seeing companies, especially in the public space, revisiting system selection, maybe they had our real estate administration system. And they said, Oh, yeah, we can do the 842 accounting, you just have to flip the switch, and add in that unit, and then when that happened, and it hasn’t really worked out so well. So they’re saying, I didn’t think I needed a system, or I thought the system I had was fine. But now they’re kind of revisiting and re-evaluating that.

And looking to get more of some of these broader business benefits out of that system and having better data, better analytics, to manage those portfolios.

Rick:

Yeah, and I think as I’ve always said it, Excel is a system, some of this work has been done in organizations, and still continues to be done in Excel. And people kind of rely on that, obviously, I think you’ve alluded to the fact as well as Brett and Lou that it’s getting more complicated, the system requirements and the timing requirements, and the integration requirements have all grown. So as a result of that, I think those kind of standalone systems really haven’t kind of bode well for a long term strategy for an organization to kind of mitigate their risk and obviously grow over time.

Let’s shift a bit into our last topic for this session, which is really around the systems themselves and the data. And I think, organizations have kind of always had really strong opinions on what they valued from a lease management perspective, what would the abstract data leases, what would they capture? What did they need to kind of drive their business objectives? Because at the end of the day, I think the reason that companies are managing this information, extracting it out of lease files and investing the money is because they see a return on that either to assist with their strategy or other activities within their business that they need to provide that data. So, Lou, if I could ask you, has the pandemic kind of increased a need for having kind of more comprehensive systems, and if so, kind of why?

Lou:

There was thunder in the background earlier. So, we get a little thunderstorm outside. I’m not sure that the pandemic increased the need. It definitely increased visibility within the companies. I do believe that the lease accounting was the biggest driver, a compliance with that was the biggest driver, to getting companies to recognize they needed to start to gather this. And the discipline that was instilled in collection of the information and change management, in order to have to every month comply, and get everything completed, has given a good backbone. What has happened now is that everyone, all the other ancillary groups who want data are starting to lean in to how can I get the system to do this. And so we’re getting into a little bit of the boil the ocean issues we ran into three or four years before transition, where people designed this macro system and then at the end, it got very narrow, we just have to get to the finish line.

So I think there is definitely a need. The other piece of the user adoption piece and for people who are casual users and we’ve had this conversation, a lot of times about the ease of getting at the data, the ease of use, once it’s there, you can’t send everything that you need through the IT group, or its get in line for your report, or get in line to get this extract. And that leads to frustration.

So from a system standpoint, the two pieces are one, there’s a data collection and validation and maintenance piece. And then there is the access and usability of the data that has to be built. And both of those, people are still wrestling with, I don’t think there’s a clear solution yet. And the systems are evolving, and the trainings evolving. But we’ve got a ways to go.

Rick:

Yeah, and obviously living this kind of day to day, I think that focus on user experience and getting information out of the system, as well as obviously making it efficient to manage the operation is definitely something kind of I’ve seen as well.

Brett, from a kind of a lease management solution standpoint, what have you seen? Have you seen more systems, less systems, more comprehensive needs? What does that look like for your clients?

Brett:

Yeah, it’s interesting. So in a area where the system’s covered, call it 90 to 95% of the same thing, we covered 25 different systems at Cushman and Wakefield, obviously, Tango, is a terrific partner for us. But we’ve seen it all over the place, really. I very much agree with Lou, I don’t know if it was the pandemic or IFRS as the ASC. But over the last four or five years, the demand has skyrocketed for this service and getting the data into a system. We rarely, I’m not saying never, but we rarely come across clients now that still have their leases in desk drawers and Excel tables. The ones that we see they’re certainly not as sophisticated as we normally come across.

But there’s just been a huge demand for this. And as the demand has risen, the systems have gotten better. But as the systems have gotten better, we’ve actually wanted to collect more data, because there’s more need for it because of the complexity of globalization and COVID, and everything else that’s going on. So it’s sort of this little circle that’s coming about, which is there’s high demand, the systems are improving, and we need to collect more data, which is just leading to more and more strain on the system, and certainly more strain on the service providers as well that we need to keep up.

Rick:

Yeah, and I think to the data and abstraction, I think what’s unique about lease administration has always been unique about leasing administration is kind of abstracting leases, right, where you get 100 or 200 page documents with all kinds of provisions and companies kind of rationalizing what provisions matter, what don’t matter, how to paraphrase things, what they need in detail. Lou, what have you seen from kind of a pure abstraction standpoint? Are we seeing some shifts here? Are we seeing different approaches relative to how people are getting this in meaning abstract versus convert from historical systems or any trends here?

Lou:    

I think the biggest change that we’ve seen over the last number of years, and Tango does this well, is getting more to structured data. And there clearly has been a bias more towards financial than legal over the last couple of years. The original lease abstraction was attorneys, paralegals, or someone reading the lease contract, creating clause summaries in text and putting them somewhere in a document so that somebody didn’t have to read the entire lease. Now, almost 80% of the focus is on the financial terms, and trying to drive through clause questions, or smart clauses or things in the system’s structured data that you can report on without having to go read the clauses.

And so the biggest trend that we’ve seen in the data is people moving away trying to find ways to do that. And that’s one of the challenges everyone has talked about AI, automated abstraction, but that initial abstraction is no longer the biggest hurdle. And investing a lot with the AI, with languages, with the quality of the OCR and those type of things. We still haven’t seen great systems that can take a four page rent clause and put it into a structured payment table in software. So there is always going to be a manual component to that. But I think I’m understanding what you need on the output is as important in designing what you abstract as just gathering the legal clauses in the historical work.

Rick:

Yeah. And I think, Brett, what I’ve seen is the clients that kind of spend the right time to figure out what they need before they start. In the end, those are important decisions or costly ones, if they don’t, and have to kind of go back and crack open files and kind of go through it again. Have you seen any changes here in terms of what’s being abstracted and the approach to abstraction that you could share?

Brett:

Yeah, in terms of what’s being abstracted, we’ve seen a gradual rise in the amount of data points that we have across all of our leases. So a couple years ago, we averaged 100 data points, now we’re averaging closer to 150 data points on an average lease. So significantly more data, I very much agree with what Lou said, on the machine learning and AI, which is there’s been a lot of money invested in that technology, that has not yet gotten to the accuracy level to get to that single point of truth. And that’s obviously the most important is having the reliable data. There’s really a question for me, which is over the next five years, 10 years, you’re looking at the future landscape of abstraction. Does machine learning actually play a role? Or are we potentially leasing in a different way?

So residential leases are all done now electronically through DocuSign and shared databases? Is there a way that commercial leases are following that same path, whereas, as opposed to actually abstracting data out of a 200 page lease, as you’re going through the leasing process, it might already be streamlined, digitized and put into the right system. So there might be a shorter, useful life on machine learning and AI in this specific space, that we might have thought a couple of years ago.

Rick:

Yeah, that’s a really interesting point. But I think that’s something we continue to monitor relative to the age old question of kind of how to get the information into the system and how to make the best use of it. But with that, I think we’re kind of at the end here of both our topics and all the great feedback that you all shared. So I really appreciate that. And thank you in participating in this session.