Reading “ground rents”, “investment”, “lease” and “artificial intelligence” in the same sentence is not common, unless you are reading a weird dystopian novel. Or perhaps you are on the Cognitiv+ blog… Read on.
Ground rents are the income paid to the freeholder of a property from a long-term leaseholder. They are due yearly and are relatively small, typically 200-400£ per year, depending on the location and value of the property.
Ground rents become interesting when they are viewed as an alternative form of investment: they are paid yearly, they are paid for a long period of time, and an important feature is that they provide a good, steady, low risk yield.
The risk is lower compared to traditional commercial or residential leases, because the leaseholder has a strong incentive to pay the ground rent rather than forfeit the property .
However, monitoring ground rent clauses in a large portfolio of agreements can be particularly challenging. This is where Artificial Intelligence-powered lease abstraction technology can help.
Monitoring the Portfolio of Leasehold Agreements
Ground rents are typically small, and they need to be aggregated in order to guarantee a meaningful investment. This means managing a large portfolio of properties, which eventually boils down to having to manage a large portfolio of contracts.
The harsh reality about real estate agreements is that they come in different shapes and formats – paper agreements often digitized in a rush, together with pdfs, pngs, jpgs and word docs. Standardization is rarely common in real estate.
You need the information contained in these agreements to be
- Available for fast review
- Easy to access
- Translated into machine readable format
Instead, what you get is:
- Having to wade through many different documents
- Having to manually search and review what you need
- Having to accept the risk that checking every single document is impossible
These are the pain points that real estate professionals, lawyers, and investors bring to us.
Why is it Important to be Able to Navigate and Review your Lease Agreement Portfolio quickly?
Having the helicopter view of your investments, how they are differentiated, and how they are changing overtime is an obvious value. The same thing is true for the lease agreements underlying your investment.
You may need to know:
- What is the aggregate value of your ground rents for all of your portfolio?
- How is the ground rent value likely to change over time?
- What is the risk associated with these changes?
Did we say change? Yes.
Although less flexible than traditional rents, ground rents can increase or decrease in a number of cases.
For instance, the parties may have agreed that the ground rent could increase if:
- It is referenced to inflation measures – i.e. retail price index or consumer price index.
- It can be adjusted to the market rent value (open market review).
- It should increase a fixed amount within a certain number of years.
This means that the investment is growing – or it’s likely to grow – at a certain point in time. This information should be promptly available.
At the same time the ground rent can decrease – or disappear completely, for a few reasons:
Enfranchisement allows leaseholders to purchase a freehold which can lead to an alteration of the initially expected cash flow profile. However, this can be mitigated when purchasing ground rents for flats rather than houses, since all of the lessees in a block of flats must agree to the enfranchisement.
The leaseholder can have the right to buy an extension of their existing lease, which in some cases, according to statutory provisions, means that there could be no future ground rent payable for a term of 90 years, plus the remaining term of the existing lease. However, the parties can negotiate different terms for lease extensions in the agreement. Another way to decrease lease extension risks can be making sure that the lease has a long term.
COVID19 has created an additional layer of uncertainty in the area of ground rent payments. Since the pandemic has begun, leaseholders have been increasingly requesting concessions, payment plans, waivers, or deferral of charges. Landlords may be wanting to renegotiate their terms or allow amendments, which in turn affects the investment.
The contract language has a direct consequence on the investment, and is why it is important to review exactly what the contract clauses say.
How long is the lease term? Is there a clause covering lease extensions? Is this a leasehold for a flat or a house – aka how likely it is that the lessee is going to exercise enfranchisement rights? How often can the ground rent be renegotiated?
Repeat this daunting review process for the entire portfolio of contracts and you will quickly understand why it is critical to have an helicopter view of all the lease agreements, being able to search, navigate, and review your contracts quickly and easily.
What is Cognitiv+ Lease Abstraction Technology?
Our Lease Abstraction tool is an artificial intelligence powered technology that allows for fast, intelligent review of your contracts. Utilizing the Lease Abstraction tool, you can quickly extract the information you need and feed it into your database management system or visualization software to monitor your portfolio at a glance.
With Cognitiv+ Lease Abstraction technology, you can easily:
- Automatically identify and extract key leasehold clauses at scale.
- Automatically identify and extract obligations.
- Data is extracted in a filterable excel spreadsheet or a Microsoft word summary.
- Extracted information can be integrated into your own system with Cognitiv+ API. You can then use or build your own technology to organize, cluster, and visualize the data.
- Personalise your experience and teach the software what it needs to look for and extract the clauses that matter to you.
- Open up key information for your estate managers.
- Monitor and understand the value of your ground rent investment.
If you would like to know more about our Lease Abstraction technology, we will be happy to provide you with a free demo of our software.