Free rent, or rent abatement, is a common and widely used concession in many commercial office leasing and residential property transactions. Landlords are offering free rent to entice tenants to sign leases and to assist with economic hardships that their tenants might face. And it’s almost exactly what it sounds like: rent that you don’t have to pay, but how does it work? Who really benefits? Are there pitfalls to consider?
The benefit of free rent for landlords is that it drives business. Many urban areas have seen people leaving amidst the pandemic and many businesses closing. Major benefits of free rent for tenants include saving money and overall satisfaction. Another benefit is also finding places tenants might not have been able to afford beforehand, offering free rent can significantly reduce the burden of cost for some tenants.
Offering your tenant free rent is not the same as offering a free ride. Free rent can be a great incentive to attract businesses while still maintaining your cash flow and business viability. It can show a property as being occupied to draw other prospective tenants. It can help a newly established, but promising, business to get on its feet; thus, ensuring a future positive and profitable relationship. Free rent can be a competitive advantage when enticing tenants to use your property, as opposed to other properties. It can also maintain property values by having a higher rent profile on the books so as not to devalue the total property.
Think of free rent as being similar to tax abatement policies used by cities to attract new business. This tactic has proved very successful for multiple cities around the country. Similarly, it has proven successful for many property owners and landlords. Not only can they give you the competitive edge, but you can place requirements on them such as length of lease and operating expense reimbursements.
Are there drawbacks to free rent (rent abatement)? Certainly. When offering a rent abatement, property owners should make sure that the discount will not cut into their ongoing property expenses such as: Common Area Maintenance (CAM); property taxes; maintenance fees and insurance. You don’t want your enticement to lead you into the red, so ensure that the tenant is still responsible for their pro rata share of the operating cost, even if they have a gross lease.. Furthermore, while it may be advantageous to offer such incentives to promising growing businesses, offering discounts to struggling businesses without clear plans for their growth can be disastrous — both for you and the business, which may have unrealistic expectations about its ability to grow. In fairness to your tenant, it is advisable that they make sure their sales will support the arrangement. Tracking tenant’s sales can be difficult, but with RAAMP’s tenant portal, tenants can report their sales and you as the landlord can monitor their sales performance easily.
In spite of the name, free rent does not have to be free. It is not intended to take money out of your pocket. It is a tool that can be used to attract a new business and be the start of a promising relationship. It can be structured in many ways so as not to make it financially disadvantageous for the landlord. Any potential financial losses, or cash flow issues, can be recouped through the structure of the lease by clearly defining the exceptions to the free rent and the tenant’s obligations under the lease..
A gross lease and a net lease are two different lease structure landlords can use for their tenants. A gross lease often include all operating expenses in the rent, so the tenant just pays one lump sum per month. A net lease usually doesn’t include operating expenses as part of the rent agreement, so the base rent is lower, but the tenant is expected to pay the additional operating expenses separately.
Consider offering free rent while adding in the lost value over the course of the lease (I.E., a higher rent than the market value to offset the initial discount). Another option is to extend the length of the lease so that the property owner is ensured to recover income over the life of the agreement. This could help extend the relationship between the property owner and the tenant. The lease should also be structured to include tenant-responsible expenses that the landlord would otherwise assume a gross lease or net lease.
To remain competitive in today’s real estate market, property owners must make use of all the tools in their toolbox. Think of free rent, or rent abatement, as one such tool. It is similar to those used across industries: coupons, discounts, even tax abatement.
RAAMP can help you to understand access and track this tool, as well as many others. Contact us today to learn more!
An index lease is a type of clause in a lease agreement that is often used in commercial real estate. Index leases, unlike traditional leases or graduated leases, don’t have a set predefined increase over time .
The term “index lease” can be explained in the same way as an adjustable-rate mortgage. Just like an adjustable-rate mortgage there can be variations in index leases. These variations usually use the consumer price index to account for the cost of inflation.
Four pillars make up index leases: base rent, common lease indexes, a rate of increase, and a growth cap. They all serve a unique function to help create an index lease. Base rent is the minimum amount the lessor will charge for rent. An index of use is a metric that changes at the same rate as the index. A rate of increase is a constant amount that will be added to the base rent. A growth cap is how much the base rent can increase each year.
Base rent is often used to describe the minimum amount of rent that’s charged on a space with variable rent. In the case of an index lease, this is typically the same as the amount charged for rent at lease commencement or the previous term. However, with other types of leases, it’s possible to have a base rent be paid in addition to operating costs or, in the case of retail, a percentage of sales.
Prime used as an index is the interest rate that banks will charge their clients with the best credit ratings.
CPI stands for consumer price index. CPI shows tenants how much their rent will increase annually. Rent tends to increase annually as property prices also increase. Leases should indicate what the annual CPI index is being used and the adjustments made to the rent amount. CPI can be seasonally adjusted and adjusted by region. It is important to know which region and indexes are being used.
The producer price index (PPI), published by the Bureau of Labor Statistics (BLS), is a group of indexes that calculates and represents the average movement in selling prices from domestic production over time.
LIBOR or London Interbank Offered Rate is a globally accepted benchmark rate. LIBOR is used by major global banks to lend to each other in the international interbank market for short-term loans. This index is being deprecated as more institutions move to other indexes.
Rent increase frequency refers to how often your variable payments are set to increase. The most common types of rent escalations occur on an annual or biannual basis.
When calculating an index lease that in itself is not a percentage such as “Prime”, the formula is (Current index value – Base index value) / Base index value. You’ll want to make sure to use this formula as a tenant or a landlord so you know how much rent to pay or collect. Let’s see how we use this equation with our own numbers.
Let’s say the current index value is 206.7 and the base index value is 201.5.
The equation for the rent increase would be as follows: (206.7 – 201.5) / 201.5 = 0.0258
After calculating the percentage of the rent increase, add it to the base rent in the following manner: $30,000 x 2.58% = $774
Using an index lease to determine the monthly rent allows it to be based on an independently published index and is less likely to be disputed by tenants. Due to the fact that everything is detailed in the published index for the tenant to review before signing the lease, they should have a very good understanding of the lease agreement. Ultimately, this will result in less problems for the tenant and the landlord.
It’s important to look at the whole picture when using an index lease. Increases should be based on the cost of inflation to the landlord’s expenses. If the landlord wants to continue making a profit they must understand how their expenses are going to change based on inflation. The CPI index is not always accurate. When creating the lease the landlord might set the CPI, however if the cost of living increases more than expected, then the CPI will not be accurate, resulting in a loss for the landlord.
Property management software is designed to replace outdated and analog processes that are time-consuming and fraught with the risks of human error. It allows property owners to manage leasing, invoicing and payments, maintenance requests, repairs, files, and more. Depending on what you’re looking for, the software you choose can cost you anywhere from a couple of hundred dollars to a couple thousand, based on the level of features and ease of use you need. If you manage more than one or two properties you really need to take this decision seriously. Key functions of Property Management Software solutions include lease abstracts, dynamic rent rolls, customer relationship management, file management, task management, a tenant portal, property analytics, accounting, and insurance compliance tools. This information is stored in a team-shared environment designed to replace disparate spreadsheets and cumbersome legacy accounting software. Incorporating this modern software will allow expenses to be better managed and could lead to increased revenue. But what businesses would benefit from investing in Property Management Software?
Property management firms can utilize Property Management Software to provide property owners with a portal, keeping track of property analytics.
Independent owners with multiple properties would also benefit from implementing Property Management Software for a handful of reasons. The first being the amount of time and money it would save. Being an independent owner with multiple properties often leaves people feeling overwhelmed and easily unorganized. With the help of Property Management Software, independent owners will have the opportunity to have a one-stop-shop to access all of their files, leasing, invoicing and payments, expense management, and so much more.
Real Estate Investment Trusts would benefit from investing in Property Management Software because it would allow them to keep all of the information on their properties organized and they would be able to access all of the information in one spot.
Businesses that have already implemented Property Management Software in their daily operations have used it to help with their lease abstraction, CRM, accounting, property management, notifications, file storage, and more. Not all Property Management Software is the same, however, some property management software does not include: CRM, file management, e-signatures & task management, SO if buying anything other than RAAMP you will need to purchase these solutions as well to run a business.
45% of property managers want to improve efficiency and Property Management Software solutions solves that very problem. Property Management Software can help organizations save time and money. The Return on Investment through time saving and less employee oversight allows for fewer people to work on the project. Before implementing Property Management Software you might be relying on a single individual for answers about a property. Now with Property Management Software, you can have more input that will allow your business to grow. Property Management Systems gives you answers; removing the burden on your key employees, allowing them to do their jobs, and saving money on expenses. The Return on Investment also prevents lost revenue.
Property management software solutions can help relieve organizations from the day-to-day stress allowing employees to do their jobs. Property management software also helps ensure that organizations are not missing out on potential revenue. Property Management Software significantly decreases the amount of time to abstract a lease and cuts the time from abstracts to rent-roll down to zero. Once a lease is abstracted, dynamic rent-rolls are instantaneous.
What should you be looking for in Property Management Software? Well, that depends on what kind of software you’re looking for. No two software programs are created the same.
Some important features for residents include a tenantcloud giving residents access to tools such as maintenance requests.
Important features for landlords include a place to collect rent for residents and manage rental properties.
When looking for a Property Management Software, you’ll want to keep in mind all of the features that come along with it. For example, some software might include lease abstracts while others might include insurance compliance tools. Another valuable feature is a free demo. Some property management software solutions will come with a free demo for users to show different functions of the software
|Software||Lease Abstract||Dynamic Rent Rolls||CRM||File Mgmt.||Notebook & Task mgmt.||Unlimited Users||Tenant Portal||Property Analytics||Accounting||Insurance Compliance|
Yardi was initially released in the 90s, so many companies have been using it for quite some time. The software has evolved over time to include more features, although some are less frequently used. Yardi Voyager is their full-featured original product, while Yardi Breeze is a scaled-back version of the software intended for lower-end users.
The best way to think about Yardi Voyager is as accounting software that also does property management. That is how the product was designed and has evolved over time. Yardi can be used for all kinds of commercial real estate businesses and use cases. They also address a global market
The Yardi Breeze product is mostly a skin of the more robust Yardi Voyager product. It has a more simplified feature set and user experience for use by smaller enterprises.
Also released in the 90s, MRI has been around for quite some time. Their platform has largely grown through acquisitions and they have many industry partners. Most users find MRI less user-friendly than Yardi and other competitors.
Propertyware is a part of RealPage, a publicly-traded company. It is less robust than RealPage and users often upgrade to RealPage to get the functionality they desire.
Appfolio is a publicly-traded company that originally was an abbreviation for “Application Portfolio” their software is best known for its focus on multi-family units.
Released is primarily for Office and Multi-Family, they are more of a task management system and a Re-Tenanting organizer.
Part of the CoStar family, they incorporate their data from LoopNet to offer more insightful property management software. They are mainly focused on large corporate investment firms.
PropertyBoss specializes in student housing and is designed to be a rental property management software.
RentManager is best suited for residential properties and offers accounting, reporting, and business operations features.
The main focus of Leasecake is managing leases. The software includes notifications for key dates.
Buildium is designed for use with residential properties in particular.
RAAMP is the only property management software platform that is lease-centered and serves as a complete operational suite for commercial real estate (CRE). The source of revenue in CRE is the lease, thus RAAMP is designed to help real estate professionals capitalize on what matters most, revenue.
Property Management Software is priced based on the kind of package and features your business needs. For example, buying a higher tiered package might be best for someone who manages multiple properties or types of properties. It’s also key to pay attention to the services offered. If the software suite doesn’t meet all your needs there will be additional costs in the form of add-on products or additional software applications from other vendors. It’s important to know how different software packages are hosted. Some applications exist only on your own server or local computer, while others exist entirely in the cloud. Many of these Property Management software platforms come with apps that are on only available as cloud-based software. This software allows you to access the app from any web browser.
It’s important to keep an eye out for the hidden costs. Some software requires additional fees to maintain the software meaning you might have to pay just to update the software in order to keep using it. In addition, the software might not come with customer service depending on the package you purchase. This could leave you on your own to troubleshoot the software and any problems you might encounter.
What Questions Should I Ask Vendors When Evaluating Property Management Products?
What Are Some Drawbacks I Should Watch Out For?
How Does Property Management Software Work?
How Much Does Software Cost?
Does QuickBooks have property management software?
How do I Choose The Right Software For Me?
Businesses actually need more than just property management software. In reality, you need a full operational suite. You could cobble together a dozen different apps or pieces of software along with spreadsheets and cabinets full of paper files, OR you could have everything in one place–ONE single source of truth.
In the 2019 Deloitte Commercial Real Estate Outlook, the report had five key takeaways, one of which explored how the rapid evolution of technology and consumer preferences is redesigning commercial real estate (CRE) business models and bringing rapid change to the industry. Concurrently, the Altus CRE Innovation report of January 2019 collected similar findings.
As detailed on the Deloitte blog, there were five key takeaways:
Proptechs are increasingly popular with investors and are expanding their coverage across the real estate value chain. The Deloitte report found there is merit in CRE companies becoming knowledgeable about proptechs, since these firms are using technology to nurture new, innovative ideas that enhance operational efficiency, tenant experience, and information flow.
While commercial real estate has a reputation for being slow to adapt to changing technology, 2019 is seeing strong gains in the adaptation of technologies to recover missed revenues, gain broad efficiencies, and create seamless integrations between properties and teams. However, while many CRE firms have now invested in integrated CRE software solutions, many are still using spreadsheets for critical CRE functions which is creating more data silos.
According to Forbes and Altus group data, total investment in real estate technology was roughly $33 million in 2010. A total of $9.6 billion was invested into real estate companies in 2018. The 2018 figure was slightly less than in 2017 ($12.6 billion), with a variety of factors cited for the decrease, including a more sophisticated investor community, and the focus of $2 billion alone on WeWork.
In its broadest sense, proptech in commercial real estate is used to reduce or eliminate many of the routine CRE tasks in transactions, valuation, property management and leasing. Investor confidence is bolstered when Commercial Real Estate Property Management firms invest in technologies due to the resulting efficiencies and overall transparency achieved.
Common types of proptech include:
Adoption of proptech can be seen as challenging for some firms however: some organizations may have concerns that migration away from spreadsheets and legacy accounting programs will create disruptions in day-to-day operations.
This is a dangerously false position, and in reality, the opposite is true: inability to adopt new technologies will jeopardize the continuity of firms and companies that do not adapt. This is a business continuity matter. The key is in choosing the right platform: one that is not over-engineered and difficult to implement. We designed RAAMP specifically for these transitioning communities.
The Altus study further cites the distinct advantages operators can expect in both top-line and bottom-line gains by implementing proptech: the use of property technology removes existing information silos and takes the guesswork out of commercial real estate investing and property management.
The Time to Change is Now
A key finding of the Altus report indicated that a large majority of firms have already invested in integrated software solutions for critical CRE functions. However, 60% of executives said their firms are still utilizing spreadsheets as their primary tool for reporting, 51% for valuation and cash flow analysis and 45% for budgeting and forecasting, indicating that despite significant innovation, the industry continues to lag in certain areas.
By improving the experience of users of commercial space and accelerating the use of shared, innovative property technologies, commercial real estate firms and investors will become more profitable and provide a competitive edge against those that refuse to adapt to the changing marketplace.
Please contact us to learn more about how RAAMP’s proptech approach can seamlessly become a part of your firm’s accelerated growth.
Schedule a demo call with a product specialist who can answer any
questions and show you the platform.
This product document sheet describes RAAMP’s approach to our intelligent Accounting Module included in our lease abstraction platform.
This product document sheet describes RAAMP’s approach to our intelligent lease abstraction platform.