Most commercial leases are dense and complex. A lease abstract makes the information more digestible by outlining pertinent financial, business, and legal provisions. Lease abstracts are helpful, time-saving resources for landlords and property managers and commercial real estate investors. However, there are important abstracting guidelines to follow to avoid obstacles and setbacks down the road.
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What Should a Lease Abstract Include?
Every commercial lease abstract is different, but most follow the same general template. Basic provisions include:
- The property’s square footage and physical address
- The tenant’s name and rental history
- Lease start and expiration dates, as well as renewal options (if any)
- The security deposit amount
A lease abstract should also touch on key legal issues, such as:
- Tenant termination rights: Some leases allow tenants to back out of the lease and vacate the property before the rental period expires. Abstracting termination rights prepares investors for the possibility of tenants leaving the lease early.
- Improvements: The abstract should indicate if the lease in question is a ground lease, which permits tenants to perform alterations and improvements on the property; once the leasing period concludes, the property and its improvements are handed over to the owner. Improvements can hinder or improve the profitability of the tenant’s business, so investors need to know if they are allowed.
- Tax regulations: The abstract should include all local, state, and federal tax regulations that apply to the property in question.
- Reimbursements: Each lease should include a thorough list of expenses tenants must reimburse to the landlord. These expenses usually include operating expenses, taxes, and property insurance.
Lease Abstracts for Retail Spaces
In addition to the details listed above, lease abstracts for retail properties may include additional details about businesses occupying the property:
- Gross sales (total sales with no deductions) for all onsite establishments
- Radius restrictions, which place geographical limitations on where tenants can open additional stores that, in theory, could compete with the property’s location
- Exclusivity agreements that indicate which types of businesses are permitted and/or prohibited on the property
- Co-tenancy clauses, which allows remaining tenants to decrease their rent if one or more other tenants vacate the property
- Other mandates for the business, such as required hours of operation
How Do Lease Abstracts Benefit Investors?
Lease abstracts help commercial real estate investors in several ways. For one, they provide a full overview of the agreement between the tenant(s) and their landlord. This knowledge enables investors to perform an accurate risk analysis – and prepare for early lease termination, refusal rights, and other potentially disruptive issues.
Abstracts can also help investors save money and generate new revenue. Understanding property taxes, reimbursements, and other financial factors is important for avoiding unnecessary fees and expenses. The abstract may also serve as a guiding tool for property improvements and alterations that can increase revenue for businesses – and investors – down the road.
Lastly, abstracts are valuable time-savers. Commercial leases can be hundreds of pages long, and some investors simply don’t have time to pore through every detail. Accurate, complete abstracts provide a comprehensive overview without the lengthy reading commitment.
Preparing and Reviewing a Lease Abstract
Rather than transcribing key lease points into an abstract by hand, many companies rely on dedicated software programs. These programs feature databases where users can enter, organize, and access various data points for leases. To generate an abstract, users simply highlight key points and transfer them onto an abstract template.
AI-based abstracting programs are a growing trend in commercial real estate. These programs offer speedier data retrieval and distribution. In theory, they also ‘train’ themselves to become more efficient over time. However, this form of technology has raised some concerns. These include literal translations resulting in inaccurate data and slow training processes. Abstract writers who are wary of AI programs can also choose from a wide range of more rudimentary platforms.
When reviewing a lease abstract, commercial real estate investors should search for the key points listed above. They should immediately alert the abstract writer of any omissions or discrepancies. If questions remain, investors should request a copy of the original lease to verify these details. These extra steps may prolong the overall process, but ultimately they save investors a great deal of time, money, and stress.
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