Commercial real estate is undergoing a transformation like never before. Gone are the days when commercial property companies refused to change, preferring to stick to the “business as usual” that had built their companies and portfolios. Now the bull run has ended. The economy is slowing, and capital, at least affordable capital, is drying up. This has pushed companies to shred their legacy processes and embrace the full potential of technology. And there has been no bigger advance in recent years than the introduction of artificial intelligence. AI has been around for a while, but only recently has its availability meant that it was able to get into the hands of so many.
For the real estate industry, AI offers a wide array of transformational capabilities, from enhancing property valuations to revolutionizing property management and market analysis.
One of the most tangible, attainable benefits of artificial intelligence is what it can do with cumbersome commercial real estate leases. It can be used to read through leases and document the data in the process. It can simplify complex commercial real estate lease language and even help foster transparent, efficient, and cooperative lease relationships. It can lead to fewer conflicts, better-informed decisions, and a more robust and prosperous commercial real estate ecosystem. Even with all of its current applications, there is no telling how impactful it will be as there are surely uses that we have not even imagined yet.
Decoding leases
Understanding the intricate jargon and legal language of commercial real estate lease agreements has long been a daunting challenge for non-experts. AI-driven tools have the capacity to translate these complex agreements in a clear, concise manner. Rather than trying to make sense of the legal jargon inside dozens of pages of a retail lease, imagine being able to use AI to ask simple questions about your lease and get equally simple answers. One of the most significant advantages of AI-driven lease comprehension tools is their ability to empower non-experts, such as franchisees, who might not possess an in-depth understanding of the intricacies of real estate leases. Corporations, while experts in their own fields, often find themselves navigating the labyrinth of lease agreements without the necessary expertise. AI’s intervention bridges this knowledge gap by offering simplified explanations of lease terms, enabling franchisees to make informed decisions without the need for specialized training.
For example, AI can take something like this:
“Tenant’s financial obligations encompass a proportionate allocation of Common Area Maintenance (CAM) charges, encompassing expenses germane to the administration, maintenance, remediation, and enhancement of communal spaces within the property. CAM charges encompass, though are not limited to, expenses linked to landscaping, parking facility maintenance, security provision, illumination, signage installation, refuse disposal, and property oversight charges. The quantum of Tenant’s CAM contribution shall be determined by deriving the ratio of the leased premises’ rentable area to the aggregate leasable area of the property. Tenant’s CAM disbursements shall be tendered on a monthly basis in advance, and Landlord shall supply an annual reconciliation of the actual CAM expenditures against the precomputed payments. Discrepancies shall be duly adjusted, resulting in corresponding invoicing or crediting of Tenant.”
And can explain it like this:
- Tenant is responsible for a share of expenses related to maintaining shared areas (CAM charges).
- Expenses cover things like landscaping, parking lot care, security, lighting, signage, and property management.
- Tenant’s share is calculated based on the size of their rented space compared to the total property size.
- Tenant pays their CAM charges monthly in advance.
- Once a year, the Landlord compares actual CAM costs to the estimated payments and adjusts for any differences.
- The Tenant will either receive an invoice for additional payment or a credit if they overpaid.
Lease agreements also come with inherent risks, and failing to understand the terms could lead to unintended consequences. AI contributes to enhanced risk management by identifying potential pitfalls within lease agreements, breaking down complex clauses, highlighting obligations, and alerting users to potential red flags. AI enables smarter decision-making, reducing the likelihood of falling into unfavorable situations. Imagine as a potential future tenant having the ability to run a lease through an AI tool before you sign it to help ensure every important detail about use, exclusivity, or assignment is included. Confirming those details within just a few moments would expedite confident execution of agreements, leading to faster deals.
Digital assistance
The integration of AI in lease comprehension also offers unparalleled efficiency and time-saving benefits. Lease abstraction and review historically have been very expensive and time consuming. AI streamlines this process by swiftly processing large volumes of data, highlighting critical points, and offering instant explanations. What might have taken days or weeks through traditional means can now be achieved in a matter of moments, leaving valuable time to spend on the many other tasks at hand.
When an HVAC unit malfunctions during a busy time, AI could help determine whether it falls under the tenant or landlord’s responsibility, find a contractor in the area, and start processing a work order instantly. This could save crucial downtime, prompt repairs, and maintain a comfortable environment for your patrons. AI could serve as your own in-house real estate expert by your side, ready to assist you at any moment. Rather than reading through the dozens of pages of your lease, you could pull up a lease chatbot, ask it who is responsible for HVAC repairs, and have the information immediately available.
Not only can AI lower the amount of work needed in complicated real estate transactions, but it can also help increase transparency and, therefore, trust. Ambiguities and misunderstandings within lease agreements can sour tenant/landlord relationships and ultimately lead to disputes. AI emerges as a powerful mediator in fostering transparency by providing both parties with a common ground for understanding. Clear, comprehensible explanations of lease terms reduce the likelihood of misinterpretations, thus laying the foundation for a good working relationship once the lease is signed. This proactive approach saves time, resources, and energy that would otherwise be spent on dispute resolution.
While AI has already made a significant impact in the world of real estate, its journey is far from over. AI tools will continue to become more sophisticated, accurate, and integrated into broader real estate processes. The evolution of AI’s use in lease comprehension could extend to predictive analytics, helping prevent problems before they start.
AI’s potential isn’t limited to lease agreements alone; it could extend to property management, portfolio analysis, and beyond. The synergy between AI and the commercial real estate industry is ushering in an era of unprecedented accessibility, transparency, and efficiency. As businesses shed legacy processes and embrace technology, AI-driven lease comprehension tools hold the promise of reshaping tenant landlord dynamics and fostering an environment where informed decisions are the norm. The future of commercial real estate is here, and it’s driven by the seemingly limitless capabilities of artificial intelligence.
