Lease abstraction is the process of reading a lease manually, or with software, and obtaining (abstracting) information required by the lease accounting system, and then populating the system with the necessary information. In implementing a new lease accounting system, the ultimate goal of abstraction is the population of all the required fields, on an accurate and timely basis, for all of your leases.
Each lease accounting technology system has a unique set of fields used to perform lease calculation and lease administration. Certain lease terms, such as lease origination, end dates and lease base rent amounts, are required to be populated within all lease systems. However, each lease accounting system has its own unique set of required data fields, or particular field formats, users must follow when populating their leases within the platform.
For relatively small lease populations, say 50 or less leases, the abstraction process can usually be performed by individuals within the organization already responsible for lease accounting and administration. However, for larger populations of leases, existing resources are rarely available within the organization to sufficiently perform the lease abstraction process—especially within the desired timing of planned lease accounting system implementation. To meet these advanced needs, organizations often rely on service providers to assist with the abstraction of their lease portfolio.
How do I initially estimate the abstraction efforts?
To demonstrate an initial time estimate for lease abstraction efforts, let’s assume you have 1,000 leases, with 100 of these leases being real estate leases and the remainder equipment leases. What’s the general rule of thumb used by those who routinely develop an initial time estimate for abstraction? It takes approximately three to four hours to abstract each real estate lease and one to two hours for each equipment lease. The length of time to abstract a lease is influenced by the number of pages one needs to review, the complexity of the leases, as well as the specific number of fields your lease system requires to be populated.
Generally speaking, real estate leases are longer in length, have multiple documents and can have more complex or special terms. These commonly include rent increases based on the Consumer Price Index, tenant improvement allowances, special obligations or other allowances. Each of these terms affects the accounting for these leases.
Using our example and our general guides in developing an initial estimate of effort required, the initial time estimate for your 1,000 leases would be 1,200 abstraction hours, or, assuming you have a year to perform abstraction, 60% of a full-time member of your team.
What level of quality review should be applied in the abstraction process?
As one can imagine, abstracting 1,000 or even 100 leases can be very tedious and requires strong attention to detail. Even the most detailed and proficient of abstractors can make errors. As such, your abstraction plan should also incorporate a review process. Depending on the complexity of your lease portfolio and the experience of your abstractors, each abstracted lease may require a review prior to populating the lease accounting system. As you can imagine, significant errors or missed information in abstractions can cause serious challenges in your accounting down the road, when they are more challenging to correct.
Those who routinely estimate abstraction efforts allow one hour for each real estate lease and a half hour for each equipment leases to perform quality reviews. Using the earlier example, these efforts would result in an additional 550 hours and a combined abstraction and review time estimate of 1,750 hours.
In addition to the review of abstractions, as you can imagine, a project of 1,000 leases would require project management oversight, coordination and guidance. These efforts are focused on coordinating the abstractors, reviewers and system implementation efforts, tracking abstraction and review progress, and establishing uniform rules addressing judgements applied in the abstraction process. Your project management team members will also address situations where lease information may be incomplete or missing and will work with your lease accounting system implementation team member who defines the specific lease system business requirements which drive the types of information the lease system will require from your leases.
Another general rule of thumb for a project of this size is that your project management efforts will probably be between 10% and 20% of the abstraction and review hours. Using our 1,000-lease example, this would add an additional 175 to 350 hours to your estimated project time, resulting in an overall initial estimate of 1,925 hours.
For larger populations of leases, project management efforts trend toward the lower end of the range, and can be 5% or lower of the abstraction and review hours. Again, these are estimates, using individuals experienced in performing and managing large-scale abstraction projects. Teams lacking such experience would be expected to incur a significant amount of additional time to learn the processes, and would not achieve proficiencies until much later in the abstraction process.
These high-level rules of thumb often result in excellent initial estimates, but there are still many different factors which can reduce or increase these initial abstraction time estimates. Just some of these factors include:
- How well you organize the leases prior to abstraction
- The amount of extraneous information or files accompanying the lease files
- The amount of required information or number of data fields you desire to be abstracted from your leases into your lease system
Lease systems will capture a considerable amount of data contained within your leases beyond what is required for accounting. Individuals who administer larger lease portfolios require such information to effectively manage their leasing relationships. It’s not uncommon to have 80 to 100 data fields to abstract from a lease into a lease system.
Time is of the essence—get started today
The abstraction of leases is almost always the longest and most important part of the project for companies with more than a couple hundred leases. The level of effort required cannot be underestimated; but too often, companies do not initially realize the undertaking abstraction requires. That’s why companies with larger populations often rely on service providers such as RSM to assist with the abstraction of their lease portfolio.
Regardless of your approach, timing is starting to become critical. You have to plan and complete abstraction efforts in time to position your technology to go live with ASC 842 in January 2022. To achieve that task, abstraction would optimally occur over the summer, with a transition to a new system taking place in the fall. Your company has options for lease abstraction—using internal employees, working with an experienced third-party, purchasing technology solutions to augment quality reviews and workflow, or a combination of these solutions—but a path forward should begin soon.