Friday, June 22, 2012

Commercial Leasing Agents - Rent Strategies in a Commercial Property Today

office property foyer and reception area
Set rent strategies for commercial and retail property

When you have a commercial property to lease it is best to look at all the required or available rent strategies before you proceed with the marketing of the property to find a tenant.  The rent strategies will be impacted by:

  • The levels of enquiry currently from qualified tenants in the market today
  • The expectations of the market and the tenants that are looking around at the moment
  • The type of and location property to be offered for lease
  • The improvements in the property today and there relevance to the market
  • Services and amenities that apply to the vacant space
  • The existing tenant mix and the lease profiles of those tenants
  • Expansion and contraction needs of other tenants in the nearby area or in other parts of the property
  • The costs of outgoings in the property now and how they are expected to change over time
  • The permitted use of the existing premises considering the levels of improvements and quality of services and amenities available
  • The number of other vacant properties that are available in the same area at the moment to lease
  • The asking rentals and lease circumstances of competing properties in the same market

So what rent strategies do you have and how can they be handled?  Here are a few to look at:

  1. A gross rent is that rent which will include outgoings.  Tenants prefer this type of rent because there are no extra costs to allow for during the year.  That being said, the landlord choosing this type of rent really does need to offset the gross rent or escalate it to allow for the outgoings that cannot be recovered from the tenant directly.  In a lease on a gross rental basis, the rent reviews will be on the full gross rent.  From a landlords point of view that is fine as long as the rent review structure over the term of the lease can keep ahead of outgoings escalations.
  2. The outgoings for the property will vary from location to location, but it is the case that the outgoings should be similar to other properties of similar type in the same location.  A property that has high outgoings will not be attractive to potential tenants.
  3. If you choose a net rent type lease, be careful to ensure that the lease agreement picks up all the outgoings that the landlord can and should recover.  The lease terms and conditions should be carefully crafted by the landlord’s solicitor to do just that.
  4. Rent reviews for the tenancy should be carefully planned and mixed by type during the duration of the lease.  Tenants like a rent that is indexed to a consumer prices index; landlords not so.  Through negotiating more effectively the landlord and or the property manager should be able to get a better rent review structure for the lease and any options that may be given.  Cash flow is important when it comes to a lease over a number of years.  It’s not always a matter of the starting levels of rent that matters; it’s where you are headed over time that is really important.
  5. As to whether you want to give the tenant an option to extend the lease is really an important question for the tenant, the property, and the tenant at the very start.  The question of an option has to be handled at the start of lease negotiations.  An option may tie up your property to some tenant and their business for a number of years.  An option can also restrict any flexibility in changes to the property and renovation or redevelopment plans that the landlord may have.