If reading the words, “turn your in-house legal department into a profit center” makes you raise an eyebrow, you aren’t alone. Short of turning lawyers into part-time salespeople, how could a legal department focusing on leasing generate new revenue for a commercial real estate company? Here’s how one LeasePilot customer did it:
Background
The company, which we’ll call OfficeCo, owns most of its assets as part of a joint venture structure with different equity sources. The in-house legal team drafts and negotiates all leases on behalf of OfficeCo and its JV partners. Each asset has an administrative budget which includes the legal spend for leasing. OfficeCo passes the leasing costs on to the assets by charging the asset back for the in-house legal team’s time.
All told, OfficeCo reduced the cost of an average deal by about 35%. With an average of 90 leases per year, that adds up to a total of $315,000 in new income.
Based on past experience OfficeCo knows that in a typical year, the average lease costs $10,000 in internal legal billing. So as part of its joint-venture agreement, OfficeCo charges a flat $10,000 fee to each asset for every lease. From the perspective of the JV partners, flat-fees are highly desirable for the certainty and predictability they provide.
For OfficeCo, the flat-fee structure presented both a risk and an opportunity. If average costs increased, the company would be on the hook for paying the difference. But, if the company could make its leasing process more efficient and reduce the average legal spend per lease to under $10,000, it could monetize the efficiency gains and capture formerly unrealized income.
Talking about efficiency is one thing. Actually finding it is entirely another. In leasing, the changes with the potential for the largest impact aren’t often straightforward or clearly identifiable (if they were, there’d be no need for this blog post!). Often, finding the most effective ways to cut costs requires a bit of creativity.
OfficeCo, to their credit, have an incredibly creative executive team. All told, the changes that they made reduced the cost of an average deal by about 35%. In real terms, that means that every single lease generated roughly $3,500. With an average of 90 leases per year, that adds up to a total of $315,000 in new income.
How they did it
The primary problem facing OfficeCo was one of predictability. While $10,000 was a safe(ish) average, it was an oversimplification of the reality: from lease to lease, the cost often varied by as much as ±25%. OfficeCo assumed (correctly, it turns out), that designing a reliable leasing workflow with more predictable costs would have the ancillary benefit of reducing costs. It’s a ‘two birds, one stone’ situation: the steps required to reach cost consistency will also reduce overall costs.
In most cases, the requests were predictable. Predictable requests mean predictable responses, and predictable responses are perfect for a software-based solution.
As OfficeCo acquired assets over the years, it inherited a multitude of leasing forms from different JV partners, lenders, and prior owners. Most of these base forms were more or less the same, differing only in small ways. The lack of a single, centralized ‘source of truth’ led to multiple independent templates, each evolving in its own unique and unintended ways. Managing these discrepancies was nearly impossible, and added unnecessary complexity to the process.
So the first thing OfficeCo did was simplify its language library by assessing and consolidating all of its leasing templates. This step took the company roughly 3 months to complete.
Eliminating and/or consolidating redundancies got OfficeCo halfway to where they wanted to be. But without a centralized database and an operationalized procedure for managing updates to the lease forms, it wouldn’t be long before things devolved right back to where they were. OfficeCo needed a reliable way to ensure that its lawyers would always have an up-to-date ‘source of truth’ for the language library going forward.
The company looked at a dozen or so different solutions which ranged from basic, off-the-shelf content management software to custom-engineered solutions built from scratch. When the dust cleared, LeasePilot stood out as the best solution due to its ability to manage a document and language repository, as well as for the automation tools that streamlined drafting, redlining, and revisions made during negotiations.
Results
Recall again OfficeCo’s base assumption about efficiency: reducing the cost variability from one lease to the next would also make the entire leasing process shorter, more efficient, and overall less expensive. Once the consolidated lease forms and asset information were imported into LeasePilot and the lawyers started using the platform, OfficeCo’s hypothesis was proven correct.
What’s more, after crunching more numbers and comparing the new leasing workflow to the old, OfficeCo learned that the bulk of the legal team’s time wasn’t spent on first drafts—it was spent on revisions and changes to the lease. Tenants would often return a bloody redline filled with change requests. Responding to those requests generally took at least four hours of a lawyer’s time. In most cases, the requests were predictable. Predictable requests mean predictable responses, and predictable responses are perfect for a software-based solution.Before using LeasePilot, OfficeCo’s legal team typically spent at least 3.5 hours assembling a first draft based on the LOI. With the automation tools now at their disposal, first drafts were usually turned around in 45-60 minutes. That’s a reduction of nearly 75%!
The Power of Software
In addition to the base forms OfficeCo loaded into LeasePilot, the company added fallback options which could be be inserted into the lease with a few clicks. Unlike other document automation tools, LeasePilot is aware of the interconnectedness of every part of the lease. This is important because much of the language in a commercial lease is dependent on language or provisions that appear elsewhere. Simply put, if one part of the lease was modified by the user, LeasePilot will update/add/remove language elsewhere in the document if necessary.
For example, if OfficeCo was unable to complete its credit review of the tenant before sending out the first draft and subsequently determines that they need a guaranty of the lease, adding one requires modifications in different parts of the lease: provisions such as default, notice, and financial reporting would need to be modified, and a completed form of guaranty needs to be added as an exhibit. LeasePilot handles these changes instantly and automatically; all the user has to do is check a box and input guarantor details one time. LeasePilot modifies the lease is accordingly.
For the rare requests that deviate from standard terms, LeasePilot’s in-browser text editing gives users the granular control over every sentence, word, and character that appears in the lease. All told, this level of automation ended up saving OfficeCo as much as 4 hours of legal time per revision.
Conclusion
While OfficeCo’s success at turning a profit from their legal team is uncommon, it’s not an anomaly or the result of special circumstance. The reality is most commercial real estate companies using in-house counsel just simply haven’t considered that the legal team could generate revenue. All it took was a shift in thinking and a few smart changes to their workflow.
