Houston lease abstraction provides summarized information regarding existing leases for a property. It summarizes information such as lease start date, lease termination date, renewal options, rental rate, escalation clauses, space included, parking rights, first right of refusal, signage options and other special provisions. Lease abstraction is an essential component of due diligence for a multi-tenant commercial property. Lease terms often vary from tenant to tenant.

Lease Abstraction Process

Lease abstraction includes reading the leases, summarizing material issues and research for key items necessary to complete a discounted cash flow analysis. Lease terms and options impact both the quantity and quality of rental income. Lease terms affect the quantity of rental income by adjustments made for factors such as rental rates and escalations. Rental rates can increase based on a variety of factors including CPI and agreed upon terms.

Details Matter

The base level for calculating escalations needs to be reviewed for each lease. Expense escalations provide the owner a buffer when expenses increase sharply due to inflation or issues impacting individual line item expenses. For example, office landlords saw the cost of electricity increase by over 100% from 2004-2006. Lease terms affect the quality of rental income based upon factors such as the tenants rights to lease additional space at a  predetermined price or to give backspace if they no longer need it.

• Renewal rights;
• First right of refusal;
• Co-tenancy clauses (tenant A can terminate lease if tenant B leaves the center);
• Right to terminate if the building does not have adequate space to meet the tenants requirements or if other factors occur;
• Escalation clauses;
• Pricing for after-hours electric;
• Parking rights and pricing;
• Signage rights;
• First right of refusal to purchase the building;
• Right to reduce rent if certain conditions are met to;
• Write to give back space which is no longer needed;
• Right to take additional space at a predetermined price.

A complete lease abstraction must be prepared before it is possible to perform financial modeling for an acquisition. A discounted cash flow analysis of a multi-tenant commercial property requires information regarding many fields of data. The lease abstraction process provides this data. The scope of the engagement can include research and analysis of whether key events (such as a lease renewed or right of first refusal) are likely to occur. The lease terms will dramatically affect current and future cash flows.  The combination of lease abstraction and financial modeling (performed using a program such as Excel or Argus) provides the investor meaningful insights into the probable cash flow for the investment.