When it comes to leasing commercial or retail property, the landlords that we work for can be too fixated on the start rent as part of the lease agreement and lease negotiation. If they are holding the property for a number of years, there are some other factors in the lease that are perhaps much more important to the lease cash flow.
The start rent of a lease is only of great concern if the property is soon to be re-valued for finance or to be taken to sale in the near future. In that case the passing rent will be capitalised and a value for the property will be set.
The fact of the matter is that the landlord wants a tenant first and foremost. In this tougher property market the landlord cannot be too focused on the start rent (within reason). As long as they get a rent that is relative to market and not aggressively high, they can pick up the growth in rental through other means over the lease term. That’s where you being a lease specialist will be of great relevance to the client. You should be the strategist to make this happen.
Here are some ideas to help with helping the landlords that you act for, get more rent.
- The start rent should be set with reference to the local market and the comparable properties that are available for occupancy. You have to attract a tenant, so the rent has to be ‘attractive’ to encourage property inspections and lease offers.
- Rent review profiles can improve the rent. Importantly you should select the rent reviews that give the landlord a realistic and sustainable rental increase. There is no point in pushing a tenant to business volatility with a high rent. When the property market is soft, tenant stability is more important than rental increase.
- Face rent and effective rent are two different things. The difference between them will be created by the use of an incentive in the lease deal. The face rent will allow the landlord to get back the cost of the incentive. The recovery should be structured into the lease rental and the rent review process. You can calculate the difference between the rentals by a calculation and an assumption of Net Present Value over the lease term.
- Car parking can be considered a separate rental. I know that some lease deals include the car parking in the base lease rent; whilst that is fine for some landlords, do not overlook the advantage of setting a rent on the car parks that are provided to the tenant. Any car parking rental could be documented on a licence or similar separate document to the lease.
- Naming rights and signage in or on a property should not be provided ‘free’. If the business wants to put their business name on a property, consider the issue of rental for that signage being positioned.
- Storage rental should be charged when possible. On-site storage for a tenant is a business advantage. If you give the tenant a special area where they can store things, determine a rental for that and set up a separate licence agreement.
- The provision of roof top space for an antenna will be another opportunity for a rental. You can add to that rental a cabling space rental for the distance that the tenant takes in dropping a cable down the building riser to their tenancy.
I know that some of you may find some of these things difficult to negotiate in all leases; I also know that some lease deals are special and a base rental ‘covers everything’. That being said, please understand that it is the job of the leasing agent to get the best ‘realistic rent’ for the landlord that helps them improve rent and also stabilise occupancy for the long term. You are the lease strategist.
Commercial Real Estate Online 