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Lease Details Matter in Sales

As the opportunity for listing commercial investment property arises, we can sometimes be too eager to take the listing without getting all the important facts that effect price.

Check the leases on a commercial investment property before you talk about price on the property as the leases may assist or hinder the sale.  They can also dictate a sale strategy.  This says that a good commercial real estate broker or agent must know the structures of a lease and what makes a good lease.

Depending on the age of a property, the next phase of its lifecycle may be refurbishment, demolition or remix of tenancies.  Every phase is different.  The demographics of the region in which the property is located will also have something to do with the future of the property.

A property that has a majority of leases that are soon to expire may be attractive to a purchaser that wants to owner occupy the property or a developer that wants to change the site and create a new building.  On the other hand the same property in such circumstances will not be attractive to a new investor unless they want to undertake refurbishment works and re-position the property with new tenants.  Decisions are based around strategy needs and timing; as agent or broker for commercial property you need to be the ultimate strategist.

When looking at the potential sale of the property, the lease aspects requiring future awareness and understanding in the sale include:

  • Rent review profiles – are they strong and well timed or do they just gear to the consumer price index?  Also look for the market rent reviews and see if they are well timed or
  • Lease expiries – these are always a concern if the property requires stable cashflow, so look for multiple lease expiries that are close to each other and that may consist of a majority of the lettable space in the building.
  • Option periods – from a landlord perspective, lease options are not always a good thing to have as they can frustrate the future of the property; it really depends on what the landlord thinks that they want to do with the property.  It is of note that many large shopping centres and malls do not allow lease options for that very reason.
  • Details of any current incentives with existing tenants – some lease incentives carry on impacting the property for some months or even years.  When the property is to be sold, these incentives must be offset or discharged at settlement as the future purchaser may not want to take over the burden of such.
  • Outgoings recoveries – leases and most particularly net leases will allow the landlord to get back some of the building operating costs.  It pays to check the leases to see exactly what those recoverable items may be as it can impact the property sale or buyer interest
  • History of income and expenditure performance – I always go back at least 3 years to check these numbers and to see what have been the major changes in the outgoings.  What you are looking for is overly large imbalances in outgoings from year to year that indicate that something major has impacted the property or a strategy has changed.  Get reasons for any changes of this type so that any astute buyer can be given logical explanations.
  • Current budget of income and expenditure performance – every commercial investment building of any type should function to a budget each year and the details should be available for your review.  Parts of the expenditure that impact greatly on the property are the rates and taxes as they take up on average a full 33% of most building expenditure.  You need to know that these rates and taxes are on average with other properties in the region.

 

Property performance elements such as these will affect the potential income from the property well into the future and will also dictate the best time to sell the property.  In an ideal world you would time the sale so that the income is optimised and the outgoings are controlled to acceptable levels.  This cannot always be done especially in markets like that which we have today, but you should know where you stand on the property performance before you proceed into a sales program.  Strengths and weaknesses of cash flow should be identified and logical reasons provided before any sale campaign starts.

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High Value of Real Estate Agency Advice

Some clients in commercial real estate are unaware that they have a problem with their property, or do not really know or can define specifically what the problem is.  They struggle to find the way ahead; they do not really know or will admit that they cannot get themselves out of a property problem.

Do you think there are some businesses and property owners out there at the moment with problems? Of course there are, and you as the real estate agent or broker have to be the relief to the property pain.  You can only be so when you really know what you are doing.  That means a really good knowledge of property types, leases, and rents, building costs, regional demographics, and operating costs.

It is not sufficient to think you know how to sell or lease a property.  That skill is not enough as most other agents will think the same.  After coaching agents for many years, I know that the reality is most of your competition is very ordinary in knowledge and property understanding.  That is the leverage you should work with to generate a massive real estate sales and leasing business.  Serve your clients as the best choice in the industry.  Is that hard?  Perhaps it takes more personal effort and certainly more study, but the rewards are significant.

Let’s just look at the types of clients you could have for a moment; they are landlords, business owners, tenants, and investors.  Within those groups you have differing relationships to the property improvements, rent, lease, location, operating costs, tenancy mix, and the list goes on.  So what do you know about these things?  What should you do?

Become an expert in every sense of the word.  Supply the best and most important information about property that you can for the client.  Make sure that you are better than the rest of the real estate people in the local area.  Become the property strategist and not just a salesperson; know what are the real reasons for a sale or lease, and help the client understand them.  Provide the best timings to use in the sale or lease processes.

The problems and challenges that these client groups have are radically different than each other.  Your solutions and responses should be set accordingly.  The best model for a real estate agent or broker in a client relationship is to become an advisor that is trusted.  Your knowledge should stand head and shoulders above the rest.  There are three stages to the process.

  1. Seek to become the clients trusted advisor from the outset.  This means building the relationship before the client really wants to do something with their property.  Prospecting is essential every day of your business life.  Your database is the tool to progress.
  2. Get the client to agree that there is a need with their property or business.  Knowledge of the property types, performance issues, lease strategies, development alternatives, tenant mix alternatives, are just some of the things to learn.
  3. Plan your solutions around the problems.  When the client fully understands the problems that you have identified with the property, and that you really know what you are doing, the choice of property agent becomes an obvious choice.

Stop thinking that as an agent you must discount your commission, or pay all the advertising costs for the client just to win the new business.  These clients are not the ones you want.  In most cases they are the hardest to deal with because their motivation is ‘cheap’.  Logical decisions are not part of their mindset and negotiations are therefore harder with these clients.  More often than not the listing does not sell because the client will not listen to the market trends and choices (they think they know better).  Time does invariably take care of these unreasonable clients, with no sale resulting and a distressed property sale or lease later on.  You can then move back into the picture to offer your special services.

Be the best real estate agent out there and make sure your clients know it.  Chase the quality listings owned by quality clients that will listen to the market trends and choices that you offer.

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Neighbourhood Shopping Centre Leasing Strategy

The neighbourhood shopping centre is the first level of retail investment property and is closely integrated to the community.   The tenant mix should be of a convenience shopping nature.   That will be the key to its success.

When designing your tenant mix strategy for the neighbourhood property, think about convenience and basic needs of the immediate community.   Is the surrounding community growing and in what way?  What do they spend their money on and how frequently?  Are they younger families or older retired families?  These questions dictate how they will spend their money.

Sometimes to really answer these questions you need a survey undertaken from the surrounding homes and families.   They know the neighbourhood better than you do and can usually tell you what the community thinks about the property and what it is missing.

Once you have your answers to these basic questions you can then move on to finding the right tenants.   As you do, give due regard to nearby competition properties and new property developments as they will have an impact on your property. 

Once you know who you want for your tenant mix and property, it’s time to pursue them:

  • Set up your target businesses by type.   Given that your property is convenience in nature you will likely need tenants in the categories of fast food, fruit and veg, baker, newsagent, chemist, hairdressing, liquor retailer, smaller supermarket.   Choose your tenants well with due regard to established trading history from other properties.
  • Cold-call the small family businesses in the area and particularly in competition properties as they will likely be interested to talk to you about your offering.   They will also tell you about the performance of the other properties.   This market intelligence is invaluable.
  • Follow up with the property managers and franchise managers or retail franchise chains.  Cracking into a well known retail chain might take several letters and follow-up phone calls.  The seeds of interest you plant today may take weeks or months to germinate but consistency and persistence will get you through the door.
  • Follow up with the supermarket chains for relocation or new premises opportunity.   The supermarket industry is highly competitive and most chains would like to keep the opposition away from getting into their ‘patch’.   The rentals on the supermarket anchor tenant are lower than the specialty tenants and they will be selective on paying their share of outgoings for the property, but you will get an anchor tenant for a long lease term to support your property.   Choose well.
  • Pay attention to the local media in new ways, with ears and eyes open for business prospects.  Even in a slow economy there are businesses that are successful.   Convenience shopping does not disappear; it just changes priority and offering to the shopper.   Read the newspaper daily, listen to the radio and watch your local TV stations not just for business news, but for ads from retailers that seem successful.  You’ll find out who’s growing, who’s moving and who (by their absence) is almost dead in the water.
  • Use local telephone books, the internet, industry groups, chamber of commerce directories and publications from local economic planning offices to tell you who’s who in the marketplace and who might be interested in moving.  Make the calls and ask the questions.  It is the secret to building a great tenant mix for your property.
  • Visit other shopping centres at different times of the week to examine the operations of potential tenant prospects.  Learn to think like your targeted retailer, understanding the operation’s strengths and weaknesses.  Know what it’s like to turn the key in that shop and what it takes to stay in business.
  • Always return every phone call from a prospect or an enquiry.   A potential tenant with a dynamic operation may be prospecting you and your property.  It doesn’t matter how off the wall or strange a person or idea sounds.  You might find some gems of occupancy among the strange and different ideas.
  • Know your trade patterns for the subject property, and that is peak trading days, traffic patterns across the property, popular established tenants, how the community uses the common areas, how the car park supports quick access to the property for the convenient shopper.
  • What is the branding of the shopping centre and do you need to do any face-lift upgrades of common areas?  Tenants will not move to something that is degraded, lacks identity, and is poorly maintained.  Poorly presented properties are a common problem in owner managed premises where the owner is inexperienced or at the smaller end of the investment scale.  You must spend money on the presentation of retail property, otherwise the rental, customer interest, and tenant base will diminish.
  • It is likely that existing tenants and potential new tenants to a property will talk before any decision is made to accept a new lease offering.   Tenant harmony and relations is therefore critical to future property occupancy and rental success.   Happy tenants usually mean good property performance.

Understand how real estate leasing brokerage can fit into the overall picture for the shopping centre.  The leasing broker or property manager can always open the door to valuable prospects, but it’s up to you to also sell the shopping centre and its future in the community.   When you know the community well, you have the keys to a great tenancy mix and property performance.

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Tenant Mix and Analysis for New Leases

Every retail shopping centre property is different and should be assessed individually to ensure that you locate the new retail tenant well in the tenant mix.  When you get the balance wrong it will impact your foot traffic, rental, customer interest, vacancy factors, sales, and other tenants.  So what should you do?  Gather all the right property information and take the time to assess what you find; this is well before you make a placement change or tenancy decision.

 The old adage ‘position, position, position’, still rings true with retail property tenant mix.  Each property is a mixture of good, average, and bad locations.  To assess this and improve it you should immediately understand:

  • the entrances points to the property
  • visitations needs and decisions of the average customer
  • the way in which people travel into and through the property
  • the car park interaction, access, and usage
  • public transport impact on the property
  • common areas of the property where people congregate
  • the time spent in the property by customers
  • the days of the week that people prefer to shop
  • what people want when they shop
  • the most popular tenants and the reason why they are so favoured
  • Are your most popular tenants leaving in the future and if so why?
  • the most unpopular tenants and the reason why they are so disliked or avoided
  • signage impact and placement across the property at all points of entry and exit
  • tenant lease duration and termination dates
  • existing vacancy factors and threats that could destabilize the tenant mix

All of these factors will put you on the track to a reasonable property assessment and improvement.  A visit to other nearby shopping centres will also help you to identify what impact those properties are having on your property.

Customer surveys and questions taken on different days of the week will help you know what the community thinks about the property and its benefit to the customer.

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Tenant Move In Checklist Investment Property

ebook on commercial real estate leasing

Whilst every commercial or retail property is different in design and usage, a process of moving a tenant into a property should be standardized.  This is for the simple reason that the tenant occupation is the beginning of the lease administration process.  The leasing or property manager for the property thereby sets the foundation for future occupation and lease stability.  Sound lease administration starts at this point.  Sound lease administration is the foundation of good property performance.

commercial office leasing system
How to find more tenants for commercial and retail buildings.

 

Communication Tips with Tenants and Landlords

Close communication with the tenant will ensure that the tenant’s needs and that of the landlord are well balanced in the establishment of lease occupation and commencement.  The three parts of the lease establishment and commencement that need balance and monitoring are:

  • Lease documentation signing and establishment
  • Physical premises fit-out design and usage
  • Rent collection and financial guarantees

One important rule needs to be made here about the commencement of lease or premises occupancy.  No tenant should be given the keys to the premises until the lease is signed by all parties and the full financial commitment of rent and all guarantees are given.  No fit-out work in the premises should commence until all of these things are done.  Many a tenant has slowed or avoided the signing of the lease once they get the keys to the premises.  If the real estate agent or broker has allowed this to occur, then embarrassment and time wasting disputes evolve.

 

Lease Stakeholders

When all of these three occupancy elements are well managed, then the occupation of the premises starts off in the best way possible setting the scene for positive ongoing relations between interested parties.  The interested parties to a new lease occupation are:

  • Tenants
  • Landlord
  • Customers
  • Property Manager
  • Leasing Manager
  • Legal Advisor for the Landlord
  • Financier for the Landlord

One of the common weak links in the leasing process with new tenants can be the poor interaction or failed communication between the leasing manager and the property manager.  Both of these people should be working in harmony when new tenants are to commence occupation, given that building relations and other tenants may be impacted by mistakes and miscommunication.  Tenants in a property will talk between each other and will inflame problems quickly.  This is more the case in retail property with many smaller tenants in the one building.

All instructions and agreements made between the tenant, the landlord, the leasing manager, and the property manager should, therefore, be made in writing or evidenced as such.  It is common for disagreement and disputes to occur at the start of lease occupation given that so much is going on at the one time, so attention to detail in the documentation at this point is critical.

An organized approach to tenants moving into a property is the best way to set the scene for property stability and the future respect between the landlord, the property manager, and the tenants.

 

Lease Moving Checklist

A checklist approach to the tenant moving into your property is productive.  Whilst every property is different and therefore special elements of occupation need to be documented and provided for, the list below will get you started on the road to leasing best practice.  You can modify the list and change the order to suit your property type and location.

 

The Lease Move-in Checklist:

  1. Tenant name and full contact details sourced
  2. Lease signed and copies served to all parties
  3. Tenant provided with all emergency contacts and procedures for the building
  4. Rent, outgoings, and all guarantees paid in accordance with the lease
  5. Insurances and currency certificates are given by tenant in accordance with the lease
  6. Any other special conditions of the lease are complied with by the tenant and the landlord
  7. Landlords works are completed as per lease agreement
  8. Premises inspection and documentation is made as part of handing keys to the tenant
  9. Details of fitout changes and plans given
  10. Approvals of fitout changes and plans given
  11. Lease commencement date
  12. Rent commencement date
  13. Anticipated move-in dates and times
  14. Method of move in and access points for goods and materials entry
  15. Instructions letter to tenant explaining the move in rules and conditions.
  16. Building Rules and Regulations Manual is provided to tenant
  17. Tenant Fitout Guide is provided to tenant
  18. Advance notice of move is given to other tenants in proximity
  19. Power, lighting, air conditioning, communications and other services to premises are operational for the tenant move.
  20. Lift isolation is made (out of main building hours) for the new tenant to use for the move
  21. Directory board changes are made to allow for the correct new tenant description and location
  22. All relevant locks and keys are made available for the tenant to use to the premises
  23. Security passes are organized as necessary for the building security system
  24. Parking details and documentation is signed and passed issued relevant to the lease and the tenant.
  25. Storage for the tenant is organized on site as required for the move and the creation of occupancy
  26. Electricity meters are read for the premises before lease occupation starts.
  27. Emergency Evacuation Systems and Procedures are provided to the tenant and training provided as necessary.
  28. Other tenants are advised of the new tenant name and a welcome to the building is provided.
  29. Rent and other outgoings charges are entered and actioned by the property manager into the building financial system.
  30. Lease details are checked and entered into the property management system.
  31. Tenant is met on site as required by the property manager to strengthen communication and feedback.
  32. Property manager to monitor tenant activity closely for the first few weeks of occupation to ensure full compliance to all agreements and arrangements.
  33. When the tenant has completed fit-out works, the property manager should check that the finished construction complies with the submitted and approved plans.

This then becomes a way of controlling the start of lease occupation in the most productive and professional way.  This will set the scene for a well-performing property and investment asset for the landlord.

You can get the leasing checklist right here:

A tenant mix checklist for commercial office and retail buildings
This is a checklist that applies to leasing commercial Office & Retail Properties. It will allow you to efficiently introduce a new tenant to your property. The checklist will help the tenant integrate into the tenancy mix.