Make Room for Lease Accounting Software

Lease managers ''would like to think that Excel will do the job,'' says one executive, but new software is helping companies rid themselves of many cumbersome manual tasks.

Esther Shein, CFO.com

April 18, 2005

Retail commercial leases are far more complicated than residential leases, says Paula Rosenblum, a director at research firm Aberdeen Group. In addition to common area maintenance, retailers must also contend with calculating taxes as well as percentage-rent and escalation clauses. Lease managers "would like to think that Excel will do the job," she observes, but in the end, "what you have is a human combing through the leases every month to see what's coming due."

That's exactly how Health Net Inc. was managing the real estate of its 108 leased locations and eight owned locations. Richard Weirich, director of real estate for the Woodland Hills, California-based health-care giant, says that the export feature in the company's accounting system was "very inferior; you couldn't get reports out of it" in response to requests from finance staffers and from external auditors.

About a year ago, Health Net turned to a real-estate software package from Accruent Inc. "The main features we like are the critical-date reports — we generate a canned report every month, and you can select critical dates you want for each location, like termination dates and options to renew," says Weirich. For example, the system can be set up to terminate a lease on a given date with however many days notice. Those factors are entered into the system and a report will pop up indicating that an employee has to take action 300 days in advance in order to give landlord 270 days notice.

The system — which is fairly easy to navigate, says Weirich — has not only eliminated the need for a manual ledger, but it has also allowed Health Net to save $90,000 in annual outsourcing fees without expanding its own three-person leasing staff.

"It's a fairly critical system,'' says Weirich.”If it died we'd figure out how to pay the rent, but it would take many more people, and we'd be scrambling to figure out how to pay it on time."

Lease accounting software is a niche that seems to be shrinking just when it should be growing, as many companies restate their financial due to their accounting for leases and leasehold improvements. Yet in the past year, Accruent has acquired two other companies that offer similar products; one of its larger remaining competitors is Cornerstone Software Inc.

Perhaps more players may enter the field, however, in response to the needs of companies like Helzberg's Diamond Shops Inc., a fast-growing retail jeweler whose 260 nationwide outlets are located primarily in malls. Although the North Kansas City, Missouri-based chain expects to add seven stores by the end of 2005, only two people handle all issues related to lease management, according to lease administration manager Ellen Zellmer.

Helzberg's also turned to real estate software from Accruent to handle all the functions that it had found so challenging to handle in Excel. Like Health Net, Helzberg's pays percentage rent automatically using monthly sales figures from its accounting system. When a company first sets up the Accruent package, says Zellmer, "you tell it all of your exclusions and what the percentage cap is.'' Then each month, running sales figures through the Accruent systems "takes literally couple of minutes."

Previously, lease analyst Jay Swartz needed two or three days just to calculate percentage rent. "With 260 locations, we would have to put all of that [information] on one Excel spreadsheet to show deductions and then use a different spreadsheet when we got the actual calculations, to send to the landlords." The Accruent software has eliminated all of the manual aspects of calculating rent, adds Zellmer.

"It's just made us a lot more productive,'' agrees Health Net's Weirich. "We have all our leases scanned and accessible in the system and we can email copies of signed leases and access the leases from the system. We're able to do far more with fewer people, and accurately."