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Evaluating lease-analysis software.

The value of your building is largely determined by the value of your present and future leases. For the manager, the ability to evaluate present leases and project future ones is vital for anticipating cash flow and estimating value. If you add lease-by-lease analysis software to your system, you will be able to accomplish these types of analyses.

Lease-by-lease software programs enable the manager to:

* Evaluate potential leases based on net present value of the future results.

* Evaluate potential leases based on a change in valuation of the property itself.

* Perform sensitivity or what-if analyses.

* Develop better revenue-side budgets and projections on a lease-by-lease, month-by-month basis.

* Budget and project expense reimbursements and escalations on a lease-by-lease basis.

* Evaluate the trade-offs and real effects of concessions and different lease-terms strategies.

If you are familiar with discounted cash flow (DCF) analysis, the current generation of lease-by-lease (LXL) programs will be impressive to you. If you are not comfortable with DCF analysis, they can be intimidating.

Most of the programs are much superior to spreadsheet models. Doing LXL analysis with a spreadsheet requires simplifying to a much greater degree than is common in lease-by-lease. If you need a spreadsheet, you can generally export the data from your LXL program.

The benefits of LXL programs include better management for your properties (whether owned or fee-managed), more and better service for your clients, and a better chance at enhanced fees for extra services.

The basics

To use lease-by-lease programs, managers must input current lease data, which can be found in the property management software system. Details must be added concerning projected concessions, escalations, percentage rent, and other factors affecting future cash flow.

Property-level details such as expenses, non-tenant revenue sources, vacancy, capital expenditures, and future property sales scenarios must also be incorporated.

You must make projections on what you think will occur in the future--lease expirations, anticipated new rental rates, tenant turnover, and leasing commission cost.

Once all the data is input, the system will calculate results and print many kinds of reports including cash flow projections, future sales results, and ROI outcomes.

Of course, as with any analysis program, the validity of the analysis is only as good as its assumptions. Start with a benchmark scenario that estimates your best, unbiased opinion of future performance. Change an input (for example, a projected rent series), recalculate the model, and check the results.

By altering and comparing model variables, you will be able to arrive at the best management strategy. Also keep in mind that you will not be able to accurately predict many of the inputs into the model--for example, the growth of property expenses.

Using LXL software

Evaluating different concessions strategies is a good way to develop familiarity and comfort with LXL software in property management. For example, develop your benchmark scenario based on current concessions and contracts and on your current concession strategy. Then compare alternative strategies and terms. See how well you understand the value/cost of your current strategy. Is it as good as you hoped?

Reimbursement strategies, rollover strategies, and specific individual leases can all be analyzed using LXL programs. Property managers can evaluate lease proposals in terms of, for example, how the benchmark property value is affected.

The manager may determine the relative merits of renting in the near term at low rates versus waiting for higher rates later. Some of the LXL programs also provide for analysis of individual leases based on net present value and net-effective-level-rent-equivalent.

Tenant representatives use lease comparison software programs to compare lease terms and structures for tenants. Unlike LXL software, which is designed to analyze an entire property, lease comparison software is intended for the comparison of individual leases. But naive property managers who do not take the time to use LXL or lease comparison software are negotiating at a disadvantage.

LXL software is also a valuable addition in developing both expense and revenue budgets. It is superior in important ways to property management software for budgeting tasks, especially for tenant-by-tenant reimbursements and escalations. Most of the good LXL programs provide true month-to-month projections (in contrast to the year divided by 12). Details are based on actual contract terms and can be projected by tenant.

The best current option for comparing actuals to budgets is to create a comparison spreadsheet, export the actuals data to it from the property management program, and export the projects/budget data to it from the LXL program.

Linking LXL and PM software

One of the most important issues for a property manager considering LXL software is the presence of an interface between the property management program and the LXL program.

An interface allows for the transfer of lease data from the property management program to the LXL software. The transfer of this data can save several hours of keyboarding, proofing, and editing to get the data into the LXL program.

This type of interfacing has been slowly developing over the past few years. Most of the major LXL programs provide for an interface with a few of the leading property management programs whose publishers have made the effort to cooperate.

That is the good news. The bad news is that the state of the art in interfacing is very primitive and awkward.

Ensuring interface access

To be certain that an interface can be achieved with the LXL program you select, ask your property management software vendors for written copies of either the data dictionary/file specification documentation for your system or the "mapping" documentation showing the specifications of an interface to a specific LXL program.

The data dictionary/file specification lists each relevant data item/field along with technical specifications such as the field number, type, length, name, and so forth. This information will enable your LXL vendor to develop an interface to your property management software.

The mapping documentation shows which specific data items in the PM program get transferred to which specific data items in the LXL program. For example, that "tenant name" data goes to the "tenant" item is obvious. But not all data correspondences are so easy. Not only are data names/field titles different, but in some cases, a combination of data items from the property management program should be transferred to a single data item in the LXL program.

The mapping documentation also should show the file/field specification data for each program. And it should have two lists--one sorted by the field order in the property management program and the other sorted by the LXL field order.

Alternatively, or concurrently, ask your LXL vendor for file specification or mapping documentation. It is not uncommon for these interfaces to be undocumented. In that case, you will need to develop your own map of which items are connected.

One LXL vendor offers a "Standard Interchange File for Real Estate," which shows how to set up data to import into that one LXL program. It is not very useful for importing data from a property management program; most of the data import specifications are relevant to a special text processor-type file.

Updating LXL data

While an interface is valuable for initial data entry for a property, especially a large one with complex current leases, LXL programs require that a great amount of data be keyed into the program directly. For example, all of the rollover data must be entered manually. Depending on the LXL program, some of that information does not need to be entered on a lease-by-lease basis.

Updating the LXL system from the property management program is generally primitive. For example, the act of transferring updated data six months later can wipe out much of the keyboarded data entered for the previous analysis.

Overall, the amount of data which can be transferred from the property management system may be small in relation to the data lost by the update transfer. So, updating from the keyboard may be the better choice.

One LXL publisher is working with at least one property management system publisher to provide an interface of month-by-month budget data back from the LXL program to the property management program. This has excellent potential for property managers.

The future of property management software in LXL

Thus far property management software publishers have not moved to develop projections/DCF/LXL programs. A few of the strong vendors have previously considered it and decided against it. And one noticeable failure a few years ago was viewed as a lesson for others.

On the other hand, the growing demand for asset management functionality improvements and the associated higher demands on property managers are creating interest in better solutions. The ability to integrate, or at least interface, LXL programs with property management systems is becoming ever more important.

If that pressure does not increase, we may limp along like this for a long time. If it does, something will change dramatically.

Through no one's fault, the fact is that the property management systems and LXL systems are fundamentally incompatible. They are like two different species, not variations of the same animal. Each of the two program types has been developed from a sound foundation. But now each has reached the limits of that foundation. The new foundations must be "databases."

Property management systems have been fundamentally accounting systems based on "procedural" concepts, not on database concepts. The use of databases as underlying foundations for generic accounting systems and later for property management systems is relatively new.

Thus, database technology is largely absent from the current interfaces available between LXL and property management programs. All the interfaces rely on primitive ASCII technology.

The "database" issue is a touchy one for more property management software publishers than you would expect. Those that have good, solid database cores for their programs will prove it to you. Those with programs that are extensively retrofitted to look like and act like databases on the surface can't prove it, but will claim it.

If a program is written in a "database language," you can assume it is a database. If it is written in a "programming language," it may or may not be a database. If it is a database and it is written in a modern programming language such as C or C++, it may be superior to a program written in a database language.

A property management program with a database core is much more than an accounting program. Even though this is a technical issue, it is important to the end user.

The future of LXL software

LXL programs are fundamentally pocket calculators with incredibly more power. The most powerful ones are awesome in terms of their number crunching abilities. And as calculating devices they are not deficient.

The problem shows up when we push them to their limits. They are so powerful and can accommodate so much detailed data that a problem now is how to get that much data into them in an efficient manner and how to access the data you really want. This is one of those frustrating problems of success.

To achieve their full potentials, the LXL programs need to strengthen their structures in several ways.

* Database for tenant information. The tenant data needed for LXL program input is stored in property management programs. This data should be stored in database files which form the core of property management programs. To transfer data from property management programs to LXL programs, the LXL programs should be built on database cores. There are many additional benefits to that type of foundation.

* Chart of accounts. LXL programs are generally superior to property management programs in budget development and month-by-month projections. This is especially so for the revenue side, including reimbursements. In addition, revision of budgets is much easier in LXL programs than in PM programs. The primary deficiency in LXL programs is how to compare budgets/projections to actuals.

The key to accessing actuals data in property management programs is through the chart of accounts. LXL programs should be built on chart-of-accounts concepts, including tenant ledger level, which are compatible with PM systems.

With good database foundations under each program, other issues of importance for budgeting, projecting, controlling, and comparing could be handled. The program could provide for comparisons of actuals to budgets/projections at the tenant level and at the subtotalling/summary/account/aggregation levels.

* Projection of future accounting results. LXL programs are currently conceived as DCF systems. A conception that makes more sense for the future is to see them as programs that project future accounting results. That fits very well with the property management system concept and with asset management needs.

By providing projections for very detailed accounting items in addition to the summary/bottom-line outcomes such as NOI, LXL analysis will open new possibilities to the property manager.

Conclusion

The available LXL programs have significant differences in their power, extensiveness, and sophistication. Each has some unique features. A couple of the programs are relatively new. And some new versions of older programs are on the way. Overall, the rate of change in the programs is increasing.

The LXL programs finally have earned their long-deserved, but long-in-coming, recognition as being far superior to spreadsheets. As a property manager you can very probably benefit from this technology. Give it a chance.

Lease What?

Confusion among terms for software program types is growing. The de facto standard types include the following:

Lease-by-lease

These programs are used by acquisition analysts, appraisers, and asset managers for evaluating whole properties, not individual leases. The property can be analyzed on a tenant-by-tenant, lease-by-lease basis instead by broad categories as is used for apartment properties.

Lease comparison

These programs are designed primarily for the use of tenants or commercial brokers. Managers or owners can, of course, use them, but rarely do so. These programs are designed primarily to compare different lease alternatives. They include columnar comparisons and net present value/cost of different leases.

Lease administration

These programs are designed for the lessee's administrative requirements of leased space. They are generally databases with a tickler system as a central feature. Some lease administration programs include non-DCF, lease-analysis features.

Lease analysis

This term usually refers to DCF analysis of individual leases instead of properties. But you also hear it used to refer to lease-by-lease software. Some, not all, lease-by-lease programs also can perform lease analysis for individual leases.

Program Vendors

Vendors of lease-by-lease analysis programs include:

Absolute Software, (800) 892-9009 Argus Financial Software, (713) 621-4343 Claymore Systems, (416) 229-3137 Dyna Software, (813) 535-0333 EOL Inc., (508) 898-3600 Financial Automation Ltd., (312) 641-2070 Financial Reporting, Inc., (214) 987-0706 Landware Systems Corporation, (604) 687-4465 H.B. Pascal & Company, (212) 496-2323 Realdex, (707) 538-4005 Real Projections, Inc., (619) 434-2180

Vendors of DCF programs primarily oriented to multifamily properties include:

Analytic Associates, (310) 541-0418 Berge Software, (800) 426-2135 Good Software, (214) 713-6370 RealData, (203) 838-2670 Transoft, (805) 963-7181

Categories of Investment Analysis Software

More than 60 off-the-shelf, or "canned," real estate investment analysis programs are currently available. About 80 others have appeared and disappeared over the last ten years. The primary distinction is between programs for existing properties (in four major categories) and programs for development analysis. A few programs encompass both types.

Existing-property programs

* Lease-by-lease. This category is the subject of this article. The programs are used for analyzing present and future cash flows of entire commercial properties on a lease-by-lease, month-by-month basis.

* DCF (discounted cash flow). These programs, used primarily for apartment properties, are not specifically designed for lease-by-lease analysis. Some of the vendors can demonstrate how to approximate lease-by-lease analysis for small properties.

* Limited function. These DCF-type programs are designed for and used by small investors as contrasted to real estate professionals. They are simplistic and generally low priced.

* Specialty. A few programs are more narrowly focused on specific needs or property types.

Development-analysis programs

These programs are available in several varieties. Some have "lease-up" analysis capabilities without real LXL capabilities. A few programs also have real LXL capabilities and can be used for existing-property analysis.

Scenario Comparison Terms

Market-value scenario: The data set which produces your best unbiased, objective estimate of the market value of the property. Concerns about the market value being too high or too low can easily lead to manipulation of inputs to produce a desired value which masquerades as the estimated value.

Benchmark scenario: A data set which you use to compare all other scenarios. You can use the market value as benchmark, but there are advantages to using a different case.

The differences between market value and benchmark may be subtle, but using a benchmark set of values for performance measurement removes the hidden agenda of manipulating the level of the value estimate. The "significance" of the market value can produce strange behavioral results and unfortunate management decisions. The "benchmark" value is clearly used for analysis.

Absolute value: A specific dollar amount, which could be the market value estimate or the benchmark value (the value result for the benchmark scenario).

Relative value: A dollar amount associated with a percentage relationship or a relation-word such as more, greater, or less. For example, "Scenario XT produces a result which is $10,000 more than the benchmark scenario."

Case: This term can be used interchangeably with "scenario." A "case" may refer to one or a few variables while a "scenario" refers to the broad set of variables.

Base case: This is similar to a benchmark for a variable; it is the hypothetical case to which all others are compared.

Index: Comparisons of different projected outcomes may be made by converting the benchmark/base result to an index of 100 and indexing other results. Merely divide the benchmark result by itself (and multiply by 100), then divide all other results by it. For example, "The case LAT index is 110."

"What-if" analysis: All programs and models allow for this analysis. Changing one or more inputs and recalculating the results shows you "what happens if ..."

Sensitivity analysis: Some LXL programs will provide a set of results in one calculation; what-if analysis produces only the basic results.

If you are familiar with spreadsheets, the "data table" function is a sensitivity analysis, while a simple recalculation of the model is a what-if analysis.

Criterion variable: The particular outcome result you are concerned with, for example, the market or benchmark value, or the IRR, cash-flow level, cash-on-cash yield, total commissions, and so on. Any calculated number in the model can serve as a criterion variable.

Many input variables which are based on judgment can also serve as criterion variables. For example, your judgment of the rollover vacancy time can be a criterion variable in comparing different management/leasing strategies. The rollover time can, in the same analysis, be varied and evaluated by other criterion variables such as benchmark value.

Michael J. Hanrahan is president of Real Estate Software Advisors and the Real Estate Software Test Lab in San Francisco. He has been a real estate software reviewer and consultant for JPM since 1987 and has independently evaluated more than 100 property management and 80 real estate investment analysis software programs.

Mr. Hanrahan advises, writes for, and conducts executive briefings, workshops, and seminars for real estate companies, trade associations, and publications about real estate software for property/asset management, investment, and other real estate applications. He is currently developing the Real Estate Software Open Systems Project.
COPYRIGHT 1993 National Association of Realtors
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Title Annotation:Computers; includes glossary of terms and list of program vendors
Author:Hanrahan, Michael J.
Publication:Journal of Property Management
Date:May 1, 1993
Words:3222
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