In commercial property management it is easy to fall into the same basic management model with all of your properties and clients. That can be the wrong thing to do, given that most properties have differences and challenges that all need to be adjusted to.
To get a reasonable management fee and keep the client and the property in your brokerage portfolio for a long period of time, it is necessary to produce a high quality service. Set new standards for your brokerage; get known as the ‘brokerage of choice’ when it comes to managing difficult and diverse properties.
Remember these facts:
- Most clients don’t do a very good job themselves in property management, so they need help. They have not got the systems and support tools that most other quality brokerages have.
- Many other property managers are a bit ordinary when it comes to skills and commitment to the task. You can usually do a better job.
- Every negotiated sale or lease is an opportunity for a property management proposal.
To attract new clients and better properties to manage here are some ideas to help you set new standards:
- Understand the client before you do anything else. They don’t just want the property managed; they want it formulated to a plan or a strategy that matches their intentions of holding the property.
- Check out the tenant mix and the leases so you can relate to the strengths and weaknesses in each. The weaknesses will need resolve or removal. Given that some leases can go for some time if not years, you will need a tenant retention plan to help you decide what tenants are going and what are staying.
- Understand the critical dates in the property with all of the leases. Act early on the dates so you are not creating a weakness in the property or income base.
- Vacancies and arrears can be challenging issues. Both require strong and sensible management or resolve. It pays in many cases initially not to remove a tenant because of arrears. Usually the arrears can be managed through hence avoiding a vacancy and loss of rent.
- Understand the income profiles and factors for the property. Match the expenditure trends to the cash flow and the requirements of the landlord. It is not so much that the bills need to be paid on time; but rather that the expenditure needs to be planned.
A good property management system will be supported by a checklist and forward planning model. Every client is different so take the time to understand the client before you do anything else. Help them with their property needs.
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.
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.
When it comes to managing commercial and retail property, it is very important to optimise the income for the landlord. The income for the property should be looked at both individually with separate leases, and across the entire property and the tenancy mix.
At the beginning of every financial year, there should be some form of budget created for the tenancy mix and the potential property income. All of the leases currently existing will have rental strategies and rental increases to merge into the income budget. This income budget can be incorporated into the business plan for the property for the upcoming year. The best time to do the budget is in the months of April and May, just prior to the beginning of the financial year.
Here are some tips relating to income optimisation in commercial or retail property management:
- Always allow for some measure and method of adjustment given that the property market is always changing in your local area. When you set a property income budget, it should be reviewed on a monthly and quarterly basis. Any established trends in the local area should be tracked and then be used as a form of rental adjustment for the landlord if those trends are firm and established.
- The vacancy factor in your local area will change based on the supply and demand of available property. To monitor this process, you should track down the changes to the property development plan in the region. Look for any new developments that could have an impact on your property. Those new developments will have a timeline of construction and occupancy; it is likely that those developers will also have an allowance for rental incentive to attract tenants into their property. That incentive will have an impact on your property leasing strategies.
- Market rentals will change from time to time. They do not always go upwards, and more commonly will stagnate or slightly reduce when the property market slows. To help you with the levels of market rental, you will need to understand the impact of incentive in the market rental structure as it exists today. If an incentive exists in any market rental negotiation, it creates what is called a face rental. That face rental will be discounted by any property valuer back to a level that is truly aligned to the effective rental and the market. Incentives create a false level of rental.
- Business sentiment will change from time to time based on the local and regional economy. Some business segments and business types will be more active and successful than others. Track those business segments and monitor the needs for property change or occupancy. Some of those tenants could be relocated to your property if the opportunity arises.
- Existing tenants in the property should be categorised into long-term tenants and short-term occupants. Some tenants will be more attractive to the landlord and the performance of the property over time. They may have a tenancy profile or business identity that encourages other tenants to the property. Reviewing the tenancy mix is called tenant retention. You can create a tenant retention plan as part of your business planning model.
- Pressures of expansion and contraction will change from time to time with all other tenants in your tenancy mix. Look for those changes, and keep close to those issues through the business year to identify any pressures of change that may need to be accommodated in the building. It is better to have a tenant in your property that you understand and appreciate, than find a new one that is unproven and costly in occupancy changeover and leasing costs.
The income for a commercial or retail property can be enhanced when you fully understand all of the above factors and adjust the property accordingly. It is not unusual to adjust the business plan or for a property three or four times during the financial year.
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