In every investment property there will be factors of change to manage and implement. In any year the pressures of the tenancy mix and the requirements of the current property ownership will generate change in property performance. In saying that, every investment property should have a business plan that takes into account the strategies of the landlord when it comes to investment outcomes.
Here are some ideas to help you track and manage change within any commercial investment property.
- Lettable space – the lettable space within the building should be optimised in a number of different ways. To do that you can move tenants around subject to the timing of leases, and the negotiations with existing tenants. To establish that level of control, you can create tenant retention plan and leasing strategy for the property. In that way you can allow for expansion and contraction requirements within each tenancy. You can also allow for the pressures of an upcoming known vacancy. If you have a high quality tenant in occupancy, it pays to help them rather than frustrate them when it comes to occupied space. A good tenant needs to be retained rather than lost.
- Renovation and refurbishment – with any investment property there will be times where renovation and refurbishment activities will need to occur within the asset. That can be a complex process given the number of tenants in the tenancy mix and the types of customers visiting the property. In any office or retail property you will find that the renovation or refurbishment concept needs to be carefully planned and managed. The effects on tenants and customers from any renovation program should be controlled at all times. Failure to do so will see a potential loss of rental and a business threat to existing tenants.
- Better tenants – understand the tenants that you have within the tenancy mix. Some tenants will be better than others when it comes to brand, marketing, rental payments, and business magnetism. Some tenants will draw business to the building and in that way encourage the overall levels of trade and exposure for other tenants in the mix. Understand the differences between your tenants, best locations for each tenant, and the clustering factors that can encourage better levels of trade and customer attraction.
- Rental upgrades – throughout the year there will be a need to assess market rentals as they apply to the location, the tenancy mix, and the property type. Rental expectations should be strategies set within the business plan for the property. Every rent review coming up over the financial year should be estimated, established and negotiated on factors within the lease document and the prevailing levels of market rent.
- Lease documents – every lease document should be reviewed for complexity and critical dates. There will be certain terms and conditions in every lease document that will have an impact on occupancy and income expectations. Some lease documents will therefore be better than others when it comes to property performance and investment results. Before you embark on any change management activity, understand the lease documents that you have currently in the property and how those lease documents will respond through the upcoming project or expected change.
- Property strengths – every investment property will have strengths and weaknesses to be understood and addressed. Any change management program should allow for an improvement in property strengths and a resolution of any weaknesses. The weaknesses can generally be removed by modifying the tenancy mix, upgrading lease documentation, and undertaking a renovation or refurbishment project.
- Improvements and services – in providing property improvements, amenities, and services to the tenants in any investment property, understand how factors of technology may be changing locally when it comes to business function and occupancy. Any modern investment property should be maintained in a way that allows for gradual improvement and upgrade when it comes to technology and tenant occupancy.
- Moving tenants – don’t be afraid to move tenants around when lease advantages and requirements are noted in the tenancy mix. Some tenants will be more successful when located to other premises within the same building. There will also be pressures of change when it comes to tenant or business expansion and contraction. Look at the clustering factors applying to the tenancy mix. Some tenants will be much more successful when placed near complementary tenants in the same building.
- Anchor tenants and specialty tenants – anchor tenants are usually those that occupy large parts of the property for a considerable period of time. The rental structure for anchor tenants will be totally different to that of specialty tenants; the levels of rent that apply to an anchor tenant will usually be less per square metre or per square foot than the rent paid by a specialty tenant. A good anchor tenant will help you attract specialty tenants and lower the vacancy rate. The strategies that apply to the two tenant types will be different and should be merged into the tenant retention plan for the property.
So there are some good things that you can do here when it comes to managing and optimising change within your commercial or retail investment property. Understand the property as it exists today, consider the prevailing market conditions, and look for the opportunities that can be created over time for the property owner. That is how you improve an investment property. Bring together the strategies of a business plan, a tenant retention plan, the lease marketing strategy, and the tenancy mix.
Once a year it is necessary to create an outgoings budget for any commercial investment property under management. After the budget has been created, the outgoings should be checked and managed to the budget over time; that is the job of the property manager. An outgoings audit will help establish an efficient and relevant budget for the asset given the size of the building, the age of the property, and the complexity of the tenancy mix. Over time that helps the landlord achieve the financial results that they seek.
Research The Facts for an Outgoings Audit
Here are some ideas to help you undertake an outgoings audit in a commercial or retail investment property:
- Understanding cash flow – The history of the property will give you some valuable information relating to cash flow. Over the last few years there will be patterns to property costs and maintenance. There will also be costs to be identified and tracked with rates and taxes. Rates and taxes will usually take up at least one third of your building expenditure budget and those numbers will be uncontrollable. Look at the averages for the area, and understand how rates and taxes have been escalating over recent time; undertake an estimate of what could happen to those figures in the current and future financial year.
- Finding expenditure savings – The idea of the outgoings audit is to achieve savings and create financial control. In analysing the outgoings for any investment property will see that the rates and taxes component will be the largest of categories. It will be quite rare for any savings to be achieved in rates and taxes; they always go up. On that basis you will need to identify savings within other categories of maintenance in the property. Control will be a focus of the outgoings budget and the spending patterns.
- Links to rental types – The outgoings categories and expenditure issues will have an impact on the rental for the property. The net income will be impacted by the recovery of outgoings. Understand the average costs that apply to expenditure within the building type. Ensure that your property is within the averages when it comes to occupancy costs. If your property is above the mark when it comes to occupancy costs, you will have some difficulty in leasing vacant premises. The tenants of today understand exactly what they should be paying when it comes to rental and outgoings.
- Vacancy pressures and non-recovery – Look for the factors of outgoings non-recovery due to vacancies. In a property with vacancy volatility, it pays to allow for some component of landlord outgoings contribution. In some properties, you will never achieve full occupancy within the tenancy mix, no matter how successful you may think your leasing program may be. On that basis the allowance for extra outgoings attributable to the vacancy factor is quite normal.
- Categories of outgoings – Always split your outgoings into categories so that you can see escalations as they arise within expenditure groups. In an older building, you will see escalations in repairs and maintenance and capital expenditure. Understand how those escalations can impact your expenditure budget over time.
- Volatility and Risk – There are factors of volatility and risk when it comes to the recovery of outgoings. The volatility factor will be driven from changes in the tenancy mix and the success or otherwise of individual tenants. Keep close to all of your tenants as part of a regular tenant contact program. Identify any occupancy threats or potential vacancy factors as early as possible. Risk is a slightly different factor when it comes to expenditure. Risk will occur as a result of locational factors and business volatility in the region. The suggestion here is that some locational factor beyond your control is likely to impact property occupancy and or occupancy costs. That could be through changes to local government policy, changes to roads, infrastructure changes, and natural environmental issues.
- Plant and Equipment – The age of the property and the associated plant and equipment will impact expenditure. Some older building control systems and ageing air conditioning plants can be quite expensive to run. That will then have an impact on energy consumption, and plant efficiencies. Any downtime in operational plant can impact tenant occupancy and the ability to trade. There is a fine balance between spending money on plant and equipment versus saving money in operational expenditure.
- Maintenance Contractors – The maintenance contractors involved in the property can help you significantly when it comes to understanding critical components within the building and essential factors of plant and equipment performance. They can also give you a good working knowledge of plant history and plant performance. They can tell you the strengths and weaknesses of the equipment within the building allowing for both age and existing condition. Importantly those maintenance contractors have to retain efficient performance within the plant and equipment whilst ensuring that the building complies with building occupational and safety codes. Work continually with the maintenance contractors within your investment building, and certainly do so very closely at times of outgoings analysis and budgetary performance.
- Capital expenditure items – In any commercial investment property you will find some factors of maintenance of a capital nature. That expenditure category will usually be for the larger pieces of plant and equipment that need to be replaced rather than repaired.
- Sinking fund – It is common to have a sinking fund in an investment property where certain monies can be set aside for larger expected matters of building and property maintenance and repair. Capital expenditure items may also be considered as part of the sinking fund although the monies retained within the sinking fund should always be split between capital items and repair items.
- Renovation and refurbishment – Most investment properties will get to a point in time where renovation and refurbishment is required. That being the case, a project management approach should occur in parallel with the outgoings maintenance budget. In that way the renovation project can be staged to fit within expected changes to the tenancy mix, established rental income expectations, the known property performance, and the current or upcoming financial year.
- Establishing a budget of control – The idea with the property budget and particularly that part relating to outgoings is to control the expenditure profile for the property so that you can remove risk and volatility from the net income. In that way the landlord can be prepared for known changes and upcoming property maintenance requirements.
So there are plenty of things that you can consider and work through as part of undertaking an outgoings audit. That audit will allow you to set the right targets and parameters relating to the tenancy mix and the lease strategy for the landlord.