How to prevent gaps in tenant exposure data: Get tenants to fill in their own NAICS code
NAREIM Online Roundtable
Tenant classification and strategies for data and asset management - June 30
Providing real-time data on your tenancy exposure to key industries has been a significant challenge for real estate investment managers.
And it’s all been down to the lack of five or six digits in your reporting systems: the NAICS codes that designate and describe precisely the business of a tenant. In an ideal world, property managers are faithfully recording NAICS codes when they sign up a new tenant or complete a renewal.
Sometimes reality is different and so NAREIM members this week discussed how to deal with the challenge of missing NAICS codes, how they were changing processes going-forward to prevent gaps in data – and how much information was meaningful for real-time analysis.
The key takeaways from the NAREIM Tenant Classification online roundtable were:
Get the tenant to do the work
Get the tenant to provide their own NAICS (North American Industry Classification System) code when they sign or renew a lease. One member best practice described during the discussion was to have the tenant complete a new field in the lease agreement that specified their NAICS code, thereby ensuring the information was available at the start of the tenant relationship.
How much is enough?
NAICS codes can run to 10-digits for certain industries, but are typically five or six digits. So what is really meaningful to real estate investment managers? Do you want to collect the full codes so you have the ability to slice and dice the data at a more granular level later on or do you need to focus (and reduce) the codes to better manage the data being collected? The longer the NAICS code, the more information you’re collecting.
For instance, codes 44 and 45 designates the retail trade. NAICS code 445 relates to food and beverage stores.
But do you want to break it down further? To continue, supermarkets (except convenience stores) have the NAICS code 44511; confectionary and nut stores have the NAICS code 445292; or other specialty food stores (selling packaged tea and coffee) which is 445299. Starbucks has two NAICS codes: 445299 as a specialty food store and 722513 as a limited-service restaurant.
Most members agreed between two to four digits was a good best practice, saying: “You don’t need to find the perfect code.”
By focusing on a reduced code, it also allowed one member to reduce their master tenant NAICS code list to around 25. Another member also said, they had a pre-set list of NAICS codes property managers could choose from to minimize the challenge of selecting the “right” code; and improve the ability of property managers to fill in the field.
It’s imperative though to understand how you want to use and analyze this data for the business in the future before deciding how much – or how little – data to collect.
Investors are starting to ask for information relating to exposure to investment grade, and non-investment grade, tenants. One member said they were beginning to explore how to collate information on credit worthiness by also utilizing DUNS numbers (the business identifiers assigned and maintained by Dun & Bradstreet).
Dealing with the historical
Members offered best practices on how to deal with historical deals, and gaps in data. Many had summer interns filling in gaps in tenant profiles, while some also had legal interns helping review provisions within leases to complete and validate information required for reporting and analysis.
What happens on a going-forward basis?
Population of the tenant and lease data is a critical role of property managers, but no system is perfect so how do investment managers ensure the data is recorded, accurately, on a going-forward basis.
As well as ideas such as fields on the tenancy agreement, it comes down to who owns the data and review process inside the business. Most members agreed the entry of the data was separate from the review and validation process.
Many members said asset managers were best positioned to help be an owner of the data or lead the oversight of the validation process when it was updated each year or period. Some had introduced responsibility matrixes, however one piece of best practice emerged for dealing with a reluctance to take ownership of data:
Tell the teams you will stop collecting the data. If the data isn’t needed, or owned, it shouldn’t be collected anyway. But if it’s important, someone will speak up and take ownership.
Third parties: Some firms were also using third parties to conduct on-going lease admin and lease reviews, and others were exploring AI for lease abstraction.
Try to create a workflow
One key piece of advice was to try to create a formal workflow around tenant and lease data within your existing systems. If a formal workflow was difficult to produce, one member suggested a checklist on a quarterly basis that was available on teams’ dashboards.