The management of a commercial property can be a complex issue. There are things to consider and plan for. The management process simply doesn’t just involve the collection of rent. There are many other things to do. A skillful property manager has to be chosen for the property type based on experience.
The larger the property, the more demanding it can be when it comes to property activities and management structures. The larger properties have complex lease structures, tenancy mix strategies, property business plans, and lease strategies.
Here are some things to merge into your property management processes whilst helping your clients to move ahead with overall investment performance.
- Most clients will be focused on the rental as the foundational issue for property benchmarking. The rental will be in the form of gross income and the net income. From the gross income there will be deductions for property running costs and expenditure. The expenditure needs to be well managed so that the net income is equal to or better than the other properties of the same type in the same area.
- The type of property will dictate the levels of enquiry and benchmarks of market rental. Review the local property market regularly to understand that your property is similar to others when it comes to market rental.
- The expenditure for the property should be managed to a business plan. Every expenditure structure should be split into the categories that apply to each property. That will include municipal rates and taxes, insurances, fire and safety, security, energy, and repairs and maintenance. As you split the expenditure, you can see where the averages are appropriate for the property type. If that is not the case, then changes need to be made.
- The tenancy mix and the lease structure will be quite important when it comes to the overall cash flow. A tenancy mix should be supported by a good standard lease document that covers the requirements of the landlord and the property as an investment. The landlord should consult with their attorney or solicitor to create a lease that is suitable for the long term cash flow that they require. A good property manager will understand lease terms and conditions and just how to administer them.
- The tenancy mix and the vacancy profile for the asset will need to be carefully tracked. The vacancy profile should be reduced whilst the tenancy mix should encourage ongoing tenant success. This then suggests that a lease negotiation is not a separate and individual thing. A good lease is created to integrate into the surrounding tenants and the property tenancy mix overall.
- The maintenance for the property will be ongoing and should be manage to the expenditure budget. Keep in close contact with the contractors for the building so that you can understand where the major items of expenditure can have an impact on property cash flow. Preparation is the key to success when it comes to expenditure and maintenance. Large costs should be managed to a time where the property can afford the expenses.
So these are some of the big things that will have an impact on your property management structure and service. Take these things and refine your services to help every client improve property performance.
In commercial real estate today, there are some significant opportunities for lease renegotiation. Some tenants would seize the opportunity for a rental reduction or lease adjustment in exchange for some benefits back to the landlord. This then says that you can through this process stabilise the tenancy mix, and rebalance the property for the longer lease term.
When the business community is under some pressure in regards to trade or occupancy, the lowering of the rental over the short term is a satisfactory exchange for other lease terms and conditions that will have benefit for the landlord. The pressures on tenants and businesses today will not remain so forever. A lower rental for 12 months can give you tenant stability through difficult times, whilst preparing the property for greater capital gain or future sale. This is what lease strategy is all about and these are the ideas that we can give our clients to help them with tenant and lease optimisation.
Lease renegotiation opportunities are normally structured into a tenant retention plan. That tenant retention plan would identify the tenants that are critical to the future of the property, and then seek to retain these tenants for the long term. Things should be done to assist them to remain in occupancy conveniently and economically. The landlord therefore benefits by tenant and rental stability. There is however the need to achieve a tradeoff and benefit for the landlord if you are to give the tenant a benefit today.
Here are some ideas that can apply to the landlord benefit process. This is assuming that you achieve or provide an adjusted lower rental for the tenants in occupancy.
- Get the tenant to exercise their option in the property early. By exercising the option, the landlord knows that the tenant will remain in occupancy for the longer term. That is the base benefit.
- You can adjust the terms of the existing lease so that the prevailing make good conditions are more beneficial to the landlord at the end of the lease term. You can obligate the tenant to undertake further renovation works if they choose to leave the premises at the end of lease. This then prepares the premises for alternative occupancy with a new tenant, at a lower cost to the landlord.
- Any lower rental today, can prepare the tenant for a higher rental at some stage in the future. This assumes that the business can be seen to be successful in coming years and months. The lower rental today provides the tenant with breathing space for generating income and repositioning their business. Over time they can likely achieve a better ability to pay the rent.
- Any longer lease term provided to the tenant today should include a renovation requirement. They can be obligated to renovate the premises in a particular way at a certain time. Normally leased premises require renovation every five years. That renovation can include painting, carpeting, and cosmetic upgrades. A suitable agreement can be struck with the tenant and appropriately documented as part of an agreement for a lower rental today.
It is in property markets like this where we can be assisting the landlords to reposition their property and stabilize the tenancy mix. That is the high value of experience and knowledge in commercial and retail real estate that we can apply to help our clients at this time.
In commercial and retail property, a top leasing agent will make a lot of commissions. That is because they specialise. They know the local businesses that are looking to move over the coming years and they work towards putting the right deals together.
In reality, landlords need the top leasing agents to help them that really understand the local area. Those top agents will have their market covered in a comprehensive database of tenant movement, lease strategies, rent alternatives, and marketing ideas. Finding the right tenant for the right property is a real skill.
Landlords do not need an agent that just knows how to lease. Anyone can put a sign on a property and list it on the internet. When you are a ‘top agent’ you will have the market coming to you because of that intense and relevant market knowledge. You will also know who are soon to be moving and for what reason. Market intelligence is invaluable in our market today as businesses change location and seek better leasing deals.
These are the skills and knowledge factors of a top leasing agent today:
- They have a comprehensive awareness of what all the local tenants are doing in their current leases. They know when those leases will expire and will work towards helping those tenants in the last year of their lease to find something of better value or relevance to the business.
- They know where the successful businesses are that will need property change. They look for tenants in pressured occupation. Expansion or contraction factors are major triggers when it comes to property leasing.
- Top agents know the landlords of the area and the best properties that create the major interest. When you can relate to those properties and the existing tenant mix, you will soon see property change and opportunity in each.
- Rentals will change from property to property and location to location. To a great degree, the rentals in any location are driven by the rate of tenant enquiry and the supply and demand for leasing space. As part of that equation it is wise to keep a close eye on the upcoming property developments in the local area. It takes about 2 years from approval to completion when it comes to getting a new investment property established. That being said, the property developer will be offering some very real incentives to attract tenants even before the property comes out of the ground.
- Lease terms and conditions are sometimes standard to a property or landlord, but they will also be influenced by the rate and type of local property enquiry. A lease that is offered for a vacant space should be matched to the prevailing market conditions and current lease enquiry. You may need to create incentives to attract that lease enquiry.
- Franchise tenants are a good source of lease enquiry. Top agents work the franchise groups to find the right properties that suit them. Those franchise groups will have a priority in location and lease terms. Get to know what the franchise groups want.
To be the best leasing agent, you can dominate your market when you know what the tenants, the landlords, and the properties are doing. Isn’t that what we should do anyway?
When it comes to the leasing of commercial property, you as the commercial real estate agent really do need to understand the trends of the local area. It really does not matter if you sell, lease, or manage property as the main part of your job; you still need to understand how to lease a property and how that lease can improve the sale or the property performance.
The clients that you work with will expect you to bring significant local market knowledge to their needs and opportunities. That local knowledge will also need to be very apparent in your sales pitch and presentation; you want the client to listen to you.
It is a fact that many agents are far too general when it comes to the initial presentation to the client of the available services and solutions for their property. Being specific to the property helps the clients really understand the relevance that you bring to the property requirement.
Leasing is one of those disciplines that will eventually create a property sale or a property management opportunity. That being said, a commercial or retail leasing specialist should be suitably versatile to talk about sales opportunity and property management strategies as well. One commission opportunity will turn into several over time.
For a commercial real estate agent to be of any relevance to the client that they serve, they will need to have a toolbox of strategies to implement for any particular client or their particular property. Those strategies should not be generic, because the client is likely to be seeing a few agents before they make a selection on what agent should get their listing.
Here are some factors for commercial and retail property agents to optimize as part of their services and solutions for clients:
- Get to know the rentals in the local area as they apply to the different property types. There are differences between gross and net rental when it comes to different property locations and property types. In some leasing circumstances you may use a net rental strategy, whilst in others you may use a gross rental strategy. Either of these choices will have impact on the rent review process that you negotiate for the particular lease.
- In any particular property market is very common to have a variety of incentives available to new tenants. The size and type of that incentive will change from time to time based on the supply and demand of premises locally. When there is little vacant space available for new tenants to occupy, it is likely that the incentive will diminish or even disappear. That will only remain the case when demand for premises exceeds supply. Over time you will see new property come into the market through fresh new property developments; the leasing leverage that each landlord creates in those circumstances will be that of an incentive. As the local property expert, you need to know the incentives that are both available and sensible for any particular property that you could be leasing. Compare those incentives to other properties nearby and in the general property market. Offer the landlord some alternatives when it comes to those incentives and how they match the needs of that tenant enquiry that you know exists currently.
- When it comes to establishing a new lease, it is best to have some regard for the existing tenants in the current property and their proximity to the current vacancy. What you want to do here is spread the risk of any vacancies occurring in adjacent premises. In other words, you want to minimize the chance of multiple vacancies occurring at the end of lease terms at about the same time. The only reason you would have any adjacent vacancies occurring would be in the circumstances where a renovation or relocation strategy was required for property improvement.
- The operating costs for the property (the outgoings) that appear in any lease negotiation should be acceptably similar to those which apply in competing properties. If your property outgoings levels are too high, then it is likely that the vacancy will remain difficult to lease. On this basis it pays to understand the levels and types of outgoings that are available and charged in competing properties in your area. There is a large difference between the outgoings or operating costs charged for a retail property, and industrial property, and an office property. Generally speaking the outgoings for a retail property are far higher than those that would apply to office property. Similarly, an industrial property is at the bottom end of the outgoings scale in occupancy cost structure.
Get to know your local property market comprehensively and thoroughly. Properties will come and go in the area from time to time, and some rental or lease transactions will occur.
Get to know the actual rents that are achieved from the particular lease deals as they are the rents that are acceptable to the enquiring parties in today’s market. As part of this process, stay abreast of the future new property developments that are coming into your region and that could have an impact on the supply and demand process.
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.
In larger retail properties today, you need a quality anchor tenant that is location based. They have to be closely aligned to the local community and the demographics of the area. For this reason, leasing managers and property managers should select anchor tenants well and ensure that the anchor tenants will build a customer base into the local area without difficulty.
A strong anchor tenant will encourage more shoppers to a retail property and help the specialty tenants with their trade and sales. The link between the anchor tenant and the property is therefore high.
To help the anchor tenant with this close alliance with the property, consider the following factors:
- The anchor tenant should be encouraged to market their business into the local area. It is wise to have some guidelines established for that process to occur. The anchor tenant’s lease can set out some guidelines for that.
- The specialty tenants should join with the anchor tenant in a regular marketing effort to promote the property. The specialty tenants can have a clause in their lease that requires them to pay a percentage of their rent to the marketing fund of the property. The property manager should administer the marketing effort on behalf of the tenants and the landlord.
- The lease for the anchor tenant will need to be a lengthy period of time to give the property some stability over the long term.
- Look at how the access to the anchor tenancy is obtained by customers and how that access can incorporate involvement or profiling of the speciality tenants in the property. Follow the ‘foot traffic’ to see what marketing effort can be established in the ‘corridor’ or pathway to the anchor tenant entry.
- The pylon sign on the property will be critical to the image and exposure for all tenants. The anchor tenant will feature in the signage and then all specialty tenants should be on the same pylon sign. Look at the pylon sign placement to passing vehicle traffic and pedestrians.
- If the local area is serviced by public transport, get some marketing material and posters into the transport systems and drop off points.
- Understand just how tenants access the property and how long they stay in the property. What do they buy when they visit? These questions will help you understand what the tenant mix requires to strengthen trade for the anchor tenant and the specialty tenants.
- Get marketing brochures into the local community and give special attention to seasonal sales or celebrations. The community will get involved with your property if you create the right atmosphere.
There is a fine balance between the tenants in the property, the community, and the landlord. The property manager or leasing manager for the property has to bring all of that together.
Any commercial property landlord today will have concerns of tenancy mix and occupancy. The landlord will not usually want a vacancy to occur in a property, or suffer a substantial loss of income from a protracted vacancy. So what can you do with this problem? You can establish a tenant retention plan for the property, and it can become part of the annual business plan for the asset.
Tenant retention is simply the process of retaining your good tenants and removing your underperforming tenants from a managed property investment. When done correctly the process can enhance the income for the property and the overall investment for the long term. This then helps the sale of the property if and when it is to occur.
How Do You Get Started?
So how can you set up a tenant retention plan and what are the rules? Over time you can set up your specific plan for your property and landlord, but to get things going here are some tips to build the first tenant plan and start the process.
- Tenant retention is a specific process of a quality commercial or retail property management process. It is necessary that you look at all your tenants in the property today and decide just who the good ones are and who are the ones that you really do not want over the long term. What are your reasons for selecting tenants in either group? You will need some rules to help you choose.
- Respecting the terms and conditions of the existing leases you can manage the poor tenants out of the property at end of their leases; the object being here to offer the space to other existing good tenants in the property, or find new tenants to fill the void. Given that this is a critical process that will impact the income for the property, it should be a factor of consideration each year as you revisit the business plan for the asset and the landlord.
- Set some target market rentals that should be used with new tenants to the property and or existing tenants when they renew their occupancy. Get a property valuer to help with the setting of the right market rental benchmarks. Give due regard to gross and net rentals, plus required incentives to encourage a tenant to take out a new lease.
- Establish a standard lease for the property to control the terms and conditions for the property each time you do a new lease. The standard lease should match the specifications of the property and the investment needs of the landlord. A solicitor should help the landlord with this document.
- Monitor all existing leases that are coming up for rent review or expiry inside of the next two years. As the dates draw nearer, the negotiations can start based on the tenant retention plan and the property decisions already made.
- Check with all your good tenants frequently to ensure that they are happy in occupancy and that they are not under pressure for expansion or contraction. If they are, then you want to be working with them on that as early as possible before another landlord offers them another tenancy space elsewhere.
A tenant retention plan is a good strategy for any landlord or property manager. It sets the scene for a controlled growth of property performance for the landlord.
When inspecting commercial property with a prospective tenant you will need to give the person concerned a package of information that outlines the property detail. The contents and comprehensiveness of the presentation packet will assist you greatly in converting the deal to a successful lease. So let’s give some thought to the contents of that ‘packet’. We have put these separate matters in a logical order that is common in the market place.
- Covering letter – This needs to summarise all previous conversations that you have had with the decision maker. It will thank them for letting you serve them with their leasing needs and it will then detail your understanding of the occupancy needs. From that point you can overview the properties that you are to take them to and let them inspect. Your reasons for showing them these particular properties should also be given.
- Map of the area and greater region – Maps are always of high value in the inspection process. You need to give maps of the immediate region of each of the relative properties to be inspected and also a map of the greater region showing transport corridors and key points of business geography such as city centres, main roads, and railheads or airports.
- Locate the properties – On your regional maps ensure that you highlight the location of the properties that you are showing. Some prospective tenants do not know where they are in relation to other parts of the town or community.
- Property review information sheet – As the name suggests every property must have a property information sheet that is carefully constructed with key property information. Given that properties can be of different types such as office, retail, or industrial, the property information sheet will be adjusted with the relevance to suit. This will include:
- Buildings name
- Area detail (site and tenancy)
- Asking rental (for the specific space plus any supplementary rentals such as signage, car parking, storage)
- Outgoings applicable to the deal
- Asking lease term
- Map of the property or tenancy
- Photographs of the property inside and out
- Floor plans of the space available for lease
- Details of council zoning that effects building usage
- Building detail to suit property type (floor loadings, height of warehouse, span detail in warehouse etc)
- Car parking detail and access points (plus a plan of the car park)
- Access detail and transport systems or corridors nearby
- Improvements provided in the premises for the occupants (carpets, walls, floors, fitout configuration, electrical supply, air conditioning layout)
- Services in the property (power, water, communications, lighting, air-conditioning, cleaning)
- Amenities provided for occupants (car parking, showers, tearooms, toilets, common areas)
- History brief of the property (this is general information on the age, architects, engineers)
- Demographic overview of the region
- Profile of neighbouring properties
- Sample draft lease document – This is not always provided at the first leasing inspection with the tenant, but it is helpful to be able to go through the general terms of the lease with the prospective tenant. This says that you must feel comfortable with knowing how to quickly scan through a lease and look for key issues to answer simple and focused questions from the tenant. Detailed lease questions are best referred on to the solicitor acting for the landlord.
- Inspection tools of trade – In any inspection you should carry the essential tools of trade to deal with any simple questions. These tools should be in your motor vehicle and easily accessible.
- Measuring tape (up to 10 meters)
- Measuring wheel (for large distances)
- Laser pointer (to illustrate points of interest in the inspection)
- Laser measuring device to measure rooms and internal space or height (you can get these from any large hardware store)
- Camera (to record matters of interest or questions from the tenant)
- Note pad
- Mobile phone (so you can call the office or the landlord if needed)
- Dictaphone for general notes during inspection
GOLDEN RULE: In any inspection of a property should you have any doubts or questions in your own mind regards a request for information from the tenant, do not ‘guess’ your response. Always suggest that you will get the full and correct answer that the tenant needs, and that you will come back later that day in writing with the relevant information. Legal action is not uncommon in the industry for things that have been said without due care.
BUSINESS COURTESY: After all leasing inspections are undertaken send a simple letter or email to the prospective tenant to thank them for their interest and suggest that you will be happy to help them with any further questions that arise. Also drop a note off to the landlord summarising the inspection and the outcome to date.
RECORDS: Keep separate written notes after all inspections with each potential tenant; it is surprising how this helps when you have premises that are attracting great interest from the market. Whilst it should go without saying, all prospective tenants must get entered into the office database after the inspection so that you can optimise the enquiry on other premises if necessary. Most tenants look around the market for only a short time (less than 2 months) and then make a new occupancy decision.