Around the world, every week seems to bring a new headline declaring the latest stats on rent non-payment and deferrals, and the impact to the real estate industry from COVID-19. Rent revenue is obviously the most pressing issue right now, but once the dust settles and we’re all back in our offices and the retail stores are open and the payment schedules are agreed, a second more insidious problem is going to become apparent: service charges and recoveries.
What the headlines usually fail to mention (because it’s not going to generate traffic or outrage) is that utilities, insurance and common area maintenance are going unpaid or deferred along with the rent. Reconciliation of vendor invoices against tenant prepayments is a tough job at the best of times, but this year’s reconciliation is going to put even the most prepared teams to the test. For those who are still doing their budgeting and reconciliation in Excel, it may well prove impossible.
The only thing that’s guaranteed is that mistakes are going to be made
Some tenants will just never return, leaving units vacant when the service charge budget forecast them to be occupied. Some will return, but in no financial state to keep up with their prepayments. Fund and asset managers will be needing to make case-by-case decisions on where to cap charges, where to defer them, and where to simply write them off. And some landlords and tenants may still be entangled in long-running disputes about how much the tenant can or should pay by the time the annual reconciliation period rolls around. If your system cannot track, amend and deal with all these situations, there are problems afoot.
On the expense side of the ledger, trouble is also brewing. Your AP team may still be battling with vendors expecting payment for periods where no services were rendered, making it difficult to close out charges for the year. Vendors may themselves have closed shop, leaving facilities managers scrambling to find replacements without the leverage to negotiate prices. Unplanned repairs or replacements of fixed assets damaged by buildings being shuttered and HVAC systems turned off during extremes of hot and cold weather will stretch your budgets at the same time as cash flow is severely strained.
In the chaos of this extraordinary year, the only thing that’s guaranteed is that mistakes are going to be made. If you are unable to perform quarterly or pro-forma reconciliations with your current solution, you may not pick up these errors while they’re still easy to correct. And looking ahead to 2021, trying to predict what next year’s budget and prepayments should look like is going to be more complex than ever before, and require some advanced scenario analysis.
The good news is, there are more solutions available to the industry than ever before
Our advice to anyone concerned by this prediction is to take a very hard look at your processes or systems right now, and if you find them lacking, take the opportunity to address the situation before year end. If you have been waiting years for service charges and recoveries to become a priority so that you can get the approval to improve your processes, that time has arrived. There will never be a stronger business case for addressing the issues than the one you have this year.
The good news is that there are also more solutions available to the industry than ever before. Our advice for assessing your options is to ask yourself the following questions:
- Does your ERP have a service charge or recoveries module that you’re not using? It may be that all you need is some expert implementation advice or a few custom tweaks to get it working for you.
- Do you have a standalone service charge or recoveries system that is doing a great job but isn’t integrated to your ERP, leading to a lot of manual data transfer? Now is the time to get those two systems talking to each other, so you can reinvest that effort into completing your reconciliations on time.
- Are you performing your reconciliations in a robust, macro-driven Excel template that is similarly working well but can’t be integrated to your ERP? Robotic Process Automation can provide new options for pulling report data into your templates and uploading it back into your accounting platform, with all the expected advantages.
- Is your in-house reconciliation process too specific to align with something off-the-shelf, but a custom solution has always been too costly? Low code solutions like the Microsoft Power Platform are now offering pragmatic ways to make use of your existing enterprise suite to generate simple but useful tools and apps for your organization.
Whether you choose to go built-in, off-the-shelf, automated or low code, there are many options available to set you up for a manageable 2020 reconciliation… but none of them can wait until 2021 to be implemented. Reach out now to find out how we can help you get ahead of the storm.