Not all rentals are the same when it comes to commercial property. Property Investors and Real Estate Agents and Brokers should understand this when considering property leasing and pricing. Use the right rental in the lease that suits the landlord, and the market. Know the long term impact of a poorly negotiated rental.
So there are two main types of rental and they are:
- Gross Rent
- Net Rent
As the name suggests, a gross rental is an all-inclusive rent for the tenant. They pay one amount of money to the landlord. To strike a rent like this, the landlord has to carefully assess the outgoings or operational costs for the property and load them on top of what would have been a net rental. There are some dangers in the process in that the landlord has to get their figures right from the start. If they do not, then the rent reviews applied to the tenant during the lease term may not keep up with the prevailing market rent. The property then becomes underperforming as an investment and will not be attractive at time of sale. Visit our site here to get more detail on this http://www.commercial-realestate-training.com/
Commercial real estate is all about cash flow; today’s cash flow or that which you can get in the future. Cash flow and rental are linked and the lease for the tenancy will protect the cash flow for the future. When purchasing a commercial property the lease has to be reviewed for its future cash flow and stability. An astute buyer knows this, and will want to see some advantage that the tenancy can provide.
Net rent is the base rent on top of which the tenant will pay outgoings for the premises. Whatever the outgoings are, the lease will again be a part of the protection of payment of outgoings for the landlord. Reading the lease will tell you exactly what outgoings a tenant needs to pay and how that will be done. The more outgoings the tenant pays the better.
Should property investors read leases themselves or leave that to their solicitor? The real answer is that a good property investor must know how to read commercial leases, and they should also have a good solicitor that will support them with a deeper review of the document as required and particularly before purchasing the property. This is called ‘due diligence’ and is one of the checking processes before the settlement of a property it made. Property Investors that are purchasing a property should make their contract and purchase subject to a satisfactory due diligence process. Expect that the due diligence process will take days if not weeks depending on the size of the asset.
One other matter that affects leases and rentals is the existence of an incentive in the tenancy. This incentive would have been created at the time of lease commencement to influence a tenant to take the lease of the premises. Incentives are common when the property market is slower or there is a lot of space available to lease at the time. Incentives could be:
- Low rent start
- Rent free period
- Fitout payment
- Cash payment
- Discounted rent, etc
If in doubt ask questions. Incentives can exist for months and possibly years after the commencement of the lease, and on that basis a purchaser of the property has to know about them prior to purchasing the property. The purchaser may choose to get the seller of the property to payout or discharge the incentive at time of sale.
9 replies on “Rent Strategies in Commercial Real Estate”
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