When it comes to commercial or retail property management today, the income for the property should be optimised given the particular property, the landlord, the property market, and the financiers. In saying that, income in a commercial property is a number of things, all of which require careful strategy and planning.
Here is a list to help you understand some of that income:
- Rent paid by the tenants in the property and under the terms of the lease. That rent will be for occupied premises or ‘demised premises’ as outlined in a lease document.
- Outgoings recovery from the tenants under the leases and given the types of rent paid in the property (gross or net).
- Extra rental for special factors such as car parking, antennas on the roof, storage areas, signage, or licenced areas external to the lease.
- Net income will be impacted by the expenditure in the property. For this reason the income management plan of a property actually involves a close look at the property expenditure.
- Some of the outgoings in a property will be recoverable from the tenants. That will usually be for consumable services such as cleaning, electricity, water, or gas. The process of recovery really depends on the property and how services are established for the tenants to use and access. Importantly you should look for the recoverable consumables in the income stream and understand what they are for. The lease for the tenant will usually give details of that recovery.
- Arrears in a property will be reflected on the monthly tenant rent invoices. Check out the rent invoices for any outstanding items. If arrears exist, find out what they are for and how they occurred. Some tenants conveniently ignore unusual charges in their rent statement. After a few months it is really hard to know what the original charge was for.
- Rent reviews are a factor that improves rent charges for the landlord (in most cases). Every lease is different and on that basis should be checked for upcoming rent reviews. Understand how those rent reviews are to be implemented and when that is to occur. Time may be of the essence for that event to occur.
- Remittance of money to the landlord is part of income management. Each month or even twice monthly, the landlord should receive money from the rental payments in the property and with the tenant mix. The balance of funds become challenging when the vacancy factors in the property start to rise.
You can add to this list based on the landlord and the property. As real estate agents, our job is to optimise the income given the prevailing factors of the property and the market.
In commercial property management, the process of income improvement is fundamental to the performance of the asset for a property investor. There are many ways the income for a property can be improved; the greater number of tenants in a property, the easier the process is. If you have a single tenant, then your options are limited.
When the property market is slow and tough, the income from the property is more important than ever before. The basic rule is to minimize the vacancies within the property and to optimise the occupancy given the available tenancy space.
Here are some further ideas for property managers to improve property income for the landlord.
- Selecting the right tenants for the property will always be an important factor in the leasing strategy overall and the property management process for the property. In an ideal world, you want tenants that can bring you both stability of occupancy and good business profile. High quality corporate tenants bring an identity to the property that may also attract other tenants to your other vacant tenancies if and when they arise in the same building.
- Rent review terms and conditions are created in and from the initial lease negotiation. To a degree, they will be shaped from the pressures of the particular lease negotiation. The lease negotiation will then be influenced by the prevailing market conditions. All of that being said, the rent review terms and conditions should be suitably shaped to improve the landlords position and rental income. Many agents and property managers choose to use or negotiate a rent review profile for a lease that is indexed to the growth in CPI. In most cases, this process only has benefit to the tenant given that the rent increases in a limited way. It is better to target rent reviews that are established to a more substantial rental increase for the landlord; that can be through a fixed percentage increase, or a fixed amount increase. Market rent reviews are also useful and worth considering, although it does depend on the property, the location, supply and demand of vacant space, and the prevailing market conditions. In the case of a property that is only average in location and presentation, it is better to choose less market rent reviews and more fixed increases. The income from the property is therefore more predictable.
- Options are useful when considering the leasing of a property. It is always wise to remember that lease options will tie the property up for a number of years beyond the initial term. Options for renewal can remove some elements of control from the landlord, and on that basis they should only be used where the landlord feels totally comfortable with the process of giving the tenant an option for a number of years. In older properties that face redundancy this can be an issue.
- Extra rental areas can occur in any building. They may be created for storage, signage, and the use of special areas in the common zone of the building. The extra rentals may be established on separate licence documentation.
- Vacant space optimisation should always be considered. A creative property manager or leasing manager will look at the variations of occupancy and how vacant space can be fully leased at a top rental. Other tenants in the property may be candidates for taking up vacant space if they need to expand.
- Tenant retention plans will help you keep the right tenants within the property. You will also help you identify those tenants that should be moved on at the end of lease occupancy and expiry.
A commercial or retail property today requires creative thinking when it comes to income optimisation. There is a fine balance between charging too much rental and charging the right rental. If the balance is not achieved, you can finish up with excessive vacancies within the property and a lack of potential tenant enquiry. This is where an experienced property manager or leasing manager can provide the knowledge and experience to a landlord. Watch the property market and the properties that you compete with; the tenants that are out there are doing the same thing.