In managing a commercial or a retail property you will need to watch the critical dates applicable to each lease and each tenant in occupation. Those dates will be relevant to important investment decisions and can have a major impact on property occupancy and rental recovery.
If you manage a large property, the number of leases and the variety of tenants can put pressures on lease management and the monitoring of critical dates. To help with that, you should get the software program to integrate into your property management systems. That software program can track the upcoming lease events and tenant management issues.
Here are some of the critical dates to look for within a lease document. Always read the lease document completely and thoroughly as part of identifying upcoming occupancy issues for both the landlord and the tenant.
- End of lease – The end of the lease is something to be planned for. At least 12 months out from lease expiry make the decisions relating to any occupied area. That means you should have a look at the terms of occupancy currently existing, the potential for renewal, and the existing tenant for relevancy within the tenancy mix.
- Rent review – The prevailing market conditions will have a lot to do with the levels of market rent applicable at rent review time. If the lease stipulates that a market rent review will apply then it is necessary to identify comparable properties and comparable leases. Factual information relating to market rental conditions will allow you to agree on a new lease rental with a tenant in a timely way. Given a tenant’s sensitivity to increasing rent in today’s market, make sure that you have a full awareness of market conditions, lease enquiry, and lease absorption. The vacancy rates in the local area will also have something to do with incentives offered to tenants and rental levels negotiated as part of any new lease or market rent review process.
- Renovation requirements – The renovation of a property or part of a property may be required as part of lease occupancy. That is certainly the case when it comes to leases over the longer term. It is also a common practice when it comes to retail premises and those within shopping centres. With any lease for a term longer than five years, it is wise to include a renovation requirement clause within the lease document. That clause will then have a critical date response by the tenant to ensure that the renovation is undertaken at the right time and in the right way.
- Insurance – Many leases today have important obligations on the landlord and the tenant regards insurance. In reading the lease document you will see obligations for both parties relating to risk management, public liability, and the insurance of the building and premises. Each year that insurance will need to be renewed at an appropriate level; the critical date associated with that renewal is something to be watched and carefully administered. A landlord or a property manager would usually obtain a copy of the insurance cover note at the appropriate time given the critical date nominated within the lease.
- Lease compliance – There are many different situations in a commercial or retail property today that could require lease compliance and response on the part of the tenant or the landlord. To understand those factors, you can read the lease document and extract the necessary dates relating to any event or any situation involving the parties. Take a note of the issue and note the relevant date into your software diary system.
- Documentation – At different times of the year certain documentation may need to be exchanged between the landlord and tenant. As an example you may find that the tenant in occupation should be supplying to the landlord the retail sales figures relating to business turnover. Commonly, and in that situation you can find that the rental charged to the tenant is geared to the level of retail sales. In a shopping centre situation the provision of sales figures by the tenant to the landlord would occur monthly or quarterly to allow for rental adjustments to occur. That is then another example of a critical date linked to occupancy and the lease document.
From these points you can see how the factors of lease compliance and critical dates are so important when it comes to commercial property occupation and property performance. A good property manager or landlord will take the time to completely review all lease documents relating to the tenancy mix and the managed property.
Stay ahead of the critical dates and the upcoming diary events. In that way you will reduce problems within the property and help the property stay on track when it comes to tenant occupancy and rental income for the landlord.
In commercial and retail property management, you do need some strategy behind the fee process. It is simply not a matter of just charging a fee based on the percentage of the income received. There will be certain activities in your property management services that require specific attention when it comes to the fee calculation.
I prefer to calculate a fee based on the amount of time to be applied to the particular property under management. This then says that you will need to know the cost factors that apply to your property management services. When you can achieve that awareness, you can understand where you are spending too much time on a particular property under management.
So let’s look at some different ways to calculate property management fees.
- There may be some local industry trends that apply to the management fee process when it comes to the different property types. Survey your competitors to ensure that you understand the fees that you are competing with. For smaller properties under management, the typical fee is approximately 5 to 7 per cent of the gross income received. As the passing income for the property gets larger, the fee tends to get lower. That being said, the fee still needs to cover the amount of work required to manage the property successfully and professionally.
- Be aware that the complexity of property management in retail property is far more significant than that which applies in industrial or office property. For this very reason, the fee to manage a retail property is much higher than the other property types.
- So the fee calculation will be based on the property type and the time input to provide management services. It is simply a matter of knowing how many hours you will spend on the management services for that particular client each week and for each particular property. You can then see where you are spending far too much time for the fee being recovered. What should you do with the property where the fee is too low? The client should be approached regards fee modification. It is best to do that across your entire property management portfolio at least once per year.
- Interview the client at the commencement of management services so you know exactly what they require from the property manager and your agency. List the services and the frequency of those services to be provided. This will remove any misunderstandings relating to ongoing services.
- There are different management duties to be provided as part of the typical property management service. Income collection, lease management, maintenance management, property inspections, and disputes are all separate services to be provided in managing a property. They may very well attract separate fee activity.
- The same can be said for leasing commercial property and minimising the vacancy factor across the tenancy mix. Specific lease strategies such as options and rent reviews will also be quite time consuming during the average property management year. Allow for these processes as part of your fee structure.
- There will be a different lease fee structure for leases negotiated with outside tenants vs. sitting tenants. There will usually be a 25% discount for leasing fees undertaken with sitting tenants.
Commercial property management services are detailed and specific. They demand a special fees strategy.
In commercial or retail property management today, there is no point in making a fee loss. Many agents look at the alternative fees that can be achieved from the property management portfolio; those extra fees being sales and leasing related. They then minimise the management fee to attract the ongoing property management business. The strategy is not good and should be avoided.
Unfortunately it is a long time before the average property will go through a sale and or a lease transaction. That means that the loss factor of the property management division will become a significant cost burden on the agency business. Get the correct management fee from the start, understanding that your property management services are of high quality in every respect. Sell your specialised services and get a good fee.
It is very easy in commercial property management to forget about performance standards as part of serving the clients that you work for. In any working week, the activities of the day can get away from you and the job just ‘gets done’. Any standards that you are working towards can easily be forgotten.
It is the larger and more sophisticated property owners that require careful attention and for that reason, performance standards are really important. You have to track the processes and systems that you provide for all owners; some of them will have special procedures and standards that must be respected.
It is up to the property manager to understand the property and the client in ways that allow them to provide the performance and portfolio outcomes required. If the client is not happy then the property will suffer and the income will slide. It is for this very reason that the top management agencies have well qualified people employed in the property management division.
Top property managers cost money from an employment perspective; however they should be attracting and managing the best properties in the local area as part of their employment. Each managed property should be charged a reasonable fee for service. If you skimp on fees, then you skimp on people, and that is a ‘downward slope’ when it comes to servicing demanding and specialised property management clients. Over time you will lose these clients if they are not well catered for.
Here are some benchmarks that should apply to performance standards in commercial and retail property management today. A property manager and management agency should be judged on these things quarterly and annually.
- Vacancy rates in the property will be of concern to the property owner. Track the vacancies and make every effort to remove them with a well-constructed lease.
- Tenant management and relations can improve a property and its performance. The property manager should be connecting will all tenants regularly to ensure that any problems are well responded to and actioned in keeping with the landlord’s requirements or instructions.
- Income control will help the landlord in many different ways. Keep on top of income collection and arrears management.
- Expenditure management is quite important throughout the property financial year. For this very reason it pays to have a budget that was set with the approval of the landlord. During the year the property can be tracked to the timed budget and any shifts in performance can be responded to early.
- Business planning will help the property in many different ways. Creating a business plan for the property at the start of the year is very wise when it comes to complex tenant retention and lease management. The plan can remove any unexpected events.
- Lease management will always be a key component of your property management service. As part of that process, seek to minimise the threat of vacancies by implementing your tenant retention plan efficiently and directly with the landlord.
- Monthly reports and landlord communication will help the property service remain on track. All monthly events and outcomes should be incorporated into the report as a tracking tool for issues and property control.
A property manager and the agency should be judged on these issues. You can add to the list as your location or property type demands. These factors become the performance standards by which your property management service can be judged.
Many commercial property managers will understand just how important the monthly report is to the clients and landlords that they serve. The information that goes out in the report must be accurate and detailed.
It is interesting to note that many monthly reports sent out to landlords are little more than a financial report from some computer based property management system. Whilst that is just fine for a basic shed or industrial property, it will not suffice for office buildings or retail property. When a property is more complex in operation or tenant mix, then you will need better reports and not just financials for the landlord to look through. Explanation and information is required.
The other fairly common problem in the industry is that many month end reports from computer based software systems are assumed to be accurate and error free; that is a big problem and will let incorrect information reach the property owners.
Here are some of the major issues that should be reported on in the monthly report for a property management landlord.
- Income analysis should occur at month end to ensure that all provided income is accurate and expected. This will include the income received during the month from all the tenancies. Any discrepancies will need to be explained and referred to the property budget. The income commentary should also include details regards rent reviews and options that have an impact on the recovery of income. In essence, you need to provide stability for the landlord in the recovery of income. Any threats of vacancy need to be minimised. Any opportunities to increase income should be identified.
- Expenditure details should be accurate and up to date. The expenditure activity in a property from month to month can vary significantly. Whilst some expenditure will be planned and budgeted for, other expenditure will remain outside a budget and will require adjustments to cash flow for the landlord. It is very important to monitor the larger items of expenditure throughout the year. Some of those larger items will be timed to payment requirements such as rates and taxes.
- Arrears will always occur in a managed property from time to time. It is really important to monitor the arrears in any property. That will firstly be for the requirements of the income recovery and legal action. There will however be secondary situations where the landlord is in agreement to stagger the recovery of arrears over a period of time from a particular tenant. Whatever the situation is, the arrears need to be continually checked and monitored on a daily basis. The landlord should be briefed for suitable action if arrears are unexpected and unexplained.
- Lease documentation changes and tenancy updates will occur throughout the year in any managed property or portfolio. Issues such as a lease option, rent review, and lease expiry will always be management challenges for you to administer in a timely way. The best way to do this is to adopt a forward looking calendar that looks to the next 12 months and any events that occur inside the timeframe. In this way you can prepare for the process and any negotiations that are required.
- Vacancy reporting will always be important. The reality of any property market is that vacancies will occur at any time and will require addressing. It is wise to keep in close contact with tenants within the property. Regular monthly meetings with the tenants will allow you to identify any upcoming vacancy challenges. As part of that process is wise to have a tenant retention plan for each and every property that you manage.
- Maintenance matters within the property will be either planned or unplanned. You should have a budget allowance for each, and monitor the repairs or replacements to plant and equipment in the property as required.
- Tenant mix changes will occur in any property and will become more complex subject to the number of tenants that you have in the portfolio and the age of the property. For this reason you should be meeting with your tenants regularly to discuss occupancy needs, matters of expansion, contraction, and relocation. The renovation and refurbishment requirements will also come into those discussions and strategies.
- Market updates will be valuable as part of the monthly report for landlords. In reporting to the landlords, you can advise them of shifts in market rental, vacancy activity, incentives, and leasing enquiry. Throughout the year there will always be changes to these factors in commercial and retail property.
So this list is not finite and complete. It does however give you an idea of the complexity of a good monthly report for a moderate to large commercial or retail property.
I go back to the earlier point; there is no point in sending out just the property financials to property management landlords, given that there are many other things going on in the average commercial or retail property needing to be fully explained to the client.
It is the quality of the property management service that you provide that will justify your property management fee and ongoing reappointment as property managers.
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