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.

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.