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.
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.
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.
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:
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:
Tenant name and full contact details sourced
Lease signed and copies served to all parties
Tenant provided with all emergency contacts and procedures for the building
Rent, outgoings, and all guarantees paid in accordance with the lease
Insurances and currency certificates are given by tenant in accordance with the lease
Any other special conditions of the lease are complied with by the tenant and the landlord
Landlords works are completed as per lease agreement
Premises inspection and documentation is made as part of handing keys to the tenant
Details of fitout changes and plans given
Approvals of fitout changes and plans given
Lease commencement date
Rent commencement date
Anticipated move-in dates and times
Method of move in and access points for goods and materials entry
Instructions letter to tenant explaining the move in rules and conditions.
Building Rules and Regulations Manual is provided to tenant
Tenant Fitout Guide is provided to tenant
Advance notice of move is given to other tenants in proximity
Power, lighting, air conditioning, communications and other services to premises are operational for the tenant move.
Lift isolation is made (out of main building hours) for the new tenant to use for the move
Directory board changes are made to allow for the correct new tenant description and location
All relevant locks and keys are made available for the tenant to use to the premises
Security passes are organized as necessary for the building security system
Parking details and documentation is signed and passed issued relevant to the lease and the tenant.
Storage for the tenant is organized on site as required for the move and the creation of occupancy
Electricity meters are read for the premises before lease occupation starts.
Emergency Evacuation Systems and Procedures are provided to the tenant and training provided as necessary.
Other tenants are advised of the new tenant name and a welcome to the building is provided.
Rent and other outgoings charges are entered and actioned by the property manager into the building financial system.
Lease details are checked and entered into the property management system.
Tenant is met on site as required by the property manager to strengthen communication and feedback.
Property manager to monitor tenant activity closely for the first few weeks of occupation to ensure full compliance to all agreements and arrangements.
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.
When a tenant commences occupation in a commercial building it is essential to set some solid rules and channels of communication early in the occupation cycle. In this way you will have a harmonious relationship into the future that can benefit the investment property.
As landlord works near readiness for occupation, it is wise to inform the tenant of the next stages that effect them and methods of occupation that are to follow. Standard letters and procedures are ideal for this purpose.
As part of this process there are 3 main outcomes that you should be seeking to satisfy in this process.
To control the way the tenant moves into the building and that the process is well managed. This will involve the use of loading docks and perhaps lift and escalators after hours. As a general rule the movement of a new tenant into any building is best managed after hours and on weekends.
To identify tenant details that need to be entered onto the building directory and similar lists and displays used by occupants and customers that visit the building. As part of this process it is important to tell other tenants in the building of the new tenant and their entry to the building. In this way you preserve quality of communication to all parties concerned.
To keep the new tenant well informed on property matters that will impact them into the future. You should be seeking to inform the new tenant of the building rules, operational elements such as air-conditioning and security, and fit out guidelines and approval processes.
Elements of the introduction letter to the tenant can incorporate the following informational topics on the property and the building:
Establishment of the move-in date to the property so that the security and lift access can be provided. You are also seeking to avoid conflict with other tenants as the move occurs. This becomes more complex and difficult if a number of tenants are moving into the property at the same time.
The tenant needs to be approached regards the detail required on the directory board to the building. It can also be that the graphics and design of the tenant’s logo will need to be incorporated into the directory board layout. It is debatable whether the tenant should pay for the entry of their business name onto the directory board. This will come down to the landlord’s decision on the matter as a gesture of goodwill in the leasing process.
Any tenant signage on the entrance doors to the tenancy or the building will need to be approved so that it does not conflict with other design elements of the property. In some circumstances it may be necessary to seek architectural comment on behalf of the landlord before the tenant can proceed with their signage. Take particular care with colours and location of the signage. If the signage is on the outside of the building, it is likely that the local planning authority will need to approve the signage before it is installed. Engineering comment may also be needed for signage placement on the exterior of the building. Signage of the tenant can or should attract a separate rental for the landlord particularly if the sign is in a place of prominence on the outside of the building and the building is located on a main road with high numbers of passing cars.
Car parking licences should be established for the tenant’s vehicles and the parks then clearly laid out on a car park plan. It is normal for car parks to have separate licence documentation that provides for both the unique elements of the property function and the use of the car park by tenants.
Communication systems access points such as those for telephone and data should be explained to the tenant. Any matters of access or special charges should also be outlined to the tenant. Take care with the tenant using the risers to the building to run cables as riser space is limited. Some landlords will charge a rental of space within the riser for this very reason.
Electricity switchboards and access points should be outlined to the tenant. Any methods of recovery of tenant electricity should also be explained. It may be that the landlord buys the energy for the building in bulk and then charges the tenants for their consumption on a monthly arrears basis. As an alternative it can be that the tenant is buying energy direct from the local energy supplier. Importantly the property manager needs to know what is correct for the property and the local energy supply legislation. Today energy supply and consumption is a critical part of building cost management; both tenants and landlords want to know that the energy supply and consumption systems on the property are correctly managed and charged.
Services and amenities that are available for the tenant should be clearly described and any costs thereto detailed. A plan of the building or the floor should detail the services and amenities that are available and how the tenant may access them.
Use of common area facilities should be shown on the appropriate floor plans. This can include toilets, showers, tea rooms, entrance foyers, lift foyers etc.
The use method and operational hours of the air conditioning for the building should be detailed and explained to the tenant. In most circumstances the air conditioning supplied by the landlord will only operate during certain daylight hours between Mondays to Fridays. Any tenant usage beyond those hours should incur a special hourly charge based on the size and type of air conditioning unit. In such circumstances the tenant consumption is metered and charged. If a tenant is a sole occupant in the building then the air conditioning running costs and maintenance may be the responsibility of the tenant; in such cases the lease of the premises should explain and support the process.
Security access systems should be explained to the tenant so that they can order the necessary security passes for staff and the passes are coded to the hours of access that the tenant needs for each individual on staff.
Security Patrols and Guards need to be briefed about the new tenant to the property and any emergency contact points or response methods documented for that tenant prior to their move to the property.
Door keys should be ordered to the access needs of the tenant. It is likely that the building master key system will be part of the keying system for the tenant doors. It is normal for tenants to seek any new keys for the premises via the property manager as the authorized party on the master key system.
Emergency evacuation procedures must be communicated to the tenant at the earliest opportunity and prior to occupation. Any threats and evacuation needs of the tenant must be efficiently handled in the evacuation plan established in the building. If the tenant brings any unusual and special threats to the property and the other occupants, then the property manager needs to take action on any needed changes to the evacuation procedures. It is normal for the property manager to appoint an expert contractor to design and implement the correct building evacuation plan for the building. That contractor will then also maintain the tenant training needed for the evacuation plan in keeping with local building and safety legislation.
Building rules and regulations are typically written into a building manual that is supplied to all tenants. From time to time the building manual will be updated. This becomes a great tool of control for tenants and building function. It also supplies the tenant with all the important and critical information relevant to the property in a concise and specific form.
Fit out procedures and approval processes must be understood by the tenant, as they will need to make changes from time to time to premises design and usage. Local planning and building codes can dictate that any tenancy changes must firstly be approved by the planning authorities. In moderate to large buildings with multiple tenants it is normal to create a fit out guide and supply such to the tenants in the building. This then becomes the rules for any changes to the tenant premises.
Property Manager and Property Maintenance contact methods should be outlined to the tenant in a contact register supplied to them. From the earliest stages of occupancy things will not always operate each and every day on the property. The tenant needs to know where to call to advise the right people of any problems. The property manager as part of this process needs should have a procedure to keep the tenant up to date on any advancement on repairs and delay times. Not all maintenance matters can be attended to quickly and efficiently if large items of cost or unusual parts are required to complete the work needed.
So these details can be a way of introducing the tenant to the building and controlling ongoing occupancy. Add to this list as your property requires. A standard letter can be framed to incorporate the necessary information relative to the tenants lease and the site.
Every tenant is different in occupancy needs. The space that they inspect to potentially lease will be interpreted differently. You have to be a good communicator to get to the key issues that the tenant sees as important to them. This uniqueness makes your job both challenging and interesting. Your skill in the process will directly relate to the commission you achieve.
Many tenants will compare premises that they inspect with a number of agents. It is likely that you are not the only agent that they are talking to at any given point in time. Remain firm and professional in your negotiations at all times.
So how do tenants analyse what they see and want? In the first instance, they analyse the economics of occupation. In the second instance, they analyse the benefits of occupation. Your negotiation process should balance the economics of occupation with the benefits of occupation in terms that the tenant sees attractive.
The following are the major points of concern in the early stages of lease negotiation. If you can satisfy these with the tenant, it is likely that you will move towards serious discussions of closure and a potential successful lease transaction.
Rents –the tenant will need to understand the levels of rental to be paid at lease commencement and the way in which they are structured. The rental structure will either be on a net or gross rent basis. It is likely that the tenants do not really understand gross and net rental so be careful on this point. The common factor that impacts both rents is how outgoings on the property are to be handled and recovered; you should have had this discussion with the landlord at the time of listing before any tenants make offers.
Landlord improvements –in most lease situations, the landlord will do some tenancy configurations in preparation for occupancy. This could be new carpet, painting, and removal of unusual or unnecessary fit out. It is possible that your tenant will want the landlord to undertake further tenancy works. This means that the initial works that are acceptable to the landlord should be quantified in cost and timing, allowing you to understand the negotiation and demands beyond that costing component if the tenant wants extra things undertaken by the landlord.
Lease deposit –in all lease situations, the landlord’s acceptance of a lease offer must be supported by the tenant providing a deposit. In most normal situations, this amount is equivalent to at least the first month’s rental.
Lease guarantee –it is normal in all leases for the tenant to provide a suitable guarantee for the term of occupancy. This can be in a number of forms including cash, director’s guarantees, or bank guarantees. The larger the tenancy, the tendency is to move towards bank guarantees in favour of the landlord. This means that the tenant needs to arrange a suitable bank guarantee in accordance with the requirements of the landlord. In most leasing situations, the bank guarantee should be equivalent to at least the total of a minimum of three months rental plus other occupancy costs such as outgoings and GST or value added tax. Where possible, landlords will ask for six months equivalent of such matters. If any incentive is provided to the tenant as part of the lease deal, the landlord may ask for the incentive to be added to the guarantee total. This protects the landlord’s outlay in the incentive if the lease deal falls through at a later time.
Incentives –in some situations and in slower markets, the landlord will agree to provide an incentive to the tenant. This needs to be quantified at listing time and clearly defined as to how it will be supplied and by what mechanism. Given that the types of incentive are different, most incentive situations will not activate until the tenant has fully complied with a signed lease, provision of necessary guarantees, and payment of the appropriate deposit monies. In other words, the landlord will not provide the incentive until the tenant has satisfied all issues of occupancy associated with entering into the lease. This is an important rule to adhere to.
Parking and costs associated thereto –parking is today essential in tenant occupancy and business function. Parking costs are sometimes part of the lease negotiation. It pays to separate the cost of parking from all other rental for the premises so that the negotiation can be separately handled. This also allows you to vary and increase the car parking costs as the tenant requires further car parks for additional staff.
Storage and the costs associated thereto –storage is quite a common requirement for tenants. On site storage within the greater building is desirable and a leasing feature. This suggests that you can have separate storage areas in the basement of the building or elsewhere that are made available to the tenants for onsite storage. It pays to separate the cost of onsite storage from all other rental for the premises. This allows you to negotiate the matter separately.
Signage –the tenant may require signage or naming rights on the premises. Whilst you will need to know comparable rentals of this type in your market, the provision of signage is normally a separate rental charge which will be handled individually in addition to any other rental. If the property is located on a major transport corridor, the value of exterior signage significantly increases. Whilst appropriate rental is charged for this, you will need to check with the local council to understand regulations and approvals that are applied to exterior signage.
Rental escalations – this is the rent review process that will apply to the ongoing lease. As the agent for the landlord, you should ensure that the rental is geared to an attractive growth structure. Inexperienced agents will negotiate leases without due regard to this fact. Rent escalations that assist the landlord with stability and growth include fixed %, fixed $ amount, ratchet clauses at market review time, and CPI plus a fixed %. Many tenants negotiate for rent reviews that are indexed only to the consumer price index. Rarely does this process greatly assist the landlord with rental growth. Remember who you act for when you negotiate the rent review profile.
Initial term of occupation –the term of occupation in the initial lease will be a key component of the negotiations. In most situations, the longer the term of occupation (say 5 years) the better it will be for the landlord unless they have a focus on renovation, demolition, or relocation. In this case, it depends on the age of the asset and the balance between tenancies. Some landlords will also look at the big picture and long term strategy where they want to support the major tenants with any further expansion space needed. This means that the smaller tenants may not be given options which could frustrate the ability of the major tenants to expand within the building. Another aspect to look at regards the initial lease term is to ensure that the lease does not expire at a similar time to other leases in the premises. This will expose the landlord to greater cash flow instability and therefore should be avoided.
Tenant refurbishment – the longer the lease term that is agreed with the tenant, the greater the need to ensure that the tenant undertake internal painting and other cosmetic upgrades to maintain the premises in a good condition. This means that the tenant can be obligated to do these works at a frequency and to a quality agreed in the lease. It is not unusual for the tenant to be made to renovate in this way each 4 or 5 years of occupation at standards set by the landlord.
Lease options –the tenant will usually ask for lease options. This is a further term of occupation beyond the initial term. As you would expect, this gives the tenant greater stability in business function. The matter of whether lease options should be provided is up to the landlord and is taken in balance with the intentions that they have for the future of the property. In a property of high profile, high exposure, and desirable location, it is likely that the market rental will escalate significantly as the years pass. This means that any lease options that are provided to the tenant should be shorter in duration and only be provided or agreed to by incorporating the mechanism of a market rent review at the time of option. If a lease option is provided to the tenant as part of the initial lease negotiation, it is productive to have the window of time for the expiry of the exercising of option, at least six months before the expiration of a lease. This allows the landlord to take alternative lease arrangements if a vacancy is imminent.
Renovation, Relocation, or Demolition – as the words suggest, the landlord could want to do some things to the property in the future. In older properties, these factors become very important in the shaping of the properties future. You need to know the status of these issues before you negotiate anything with the tenant.
Makegood provisions – at the end of the lease the landlord should obligate the tenant to undertake certain works to return the premises to a level of presentation that assists in its re-leasing. The only way you can do this is through a clear and comprehensive set of make-good provisions in the lease.
Draft lease document –as discussions become serious between the landlord and the tenant, the draft lease document will need to be supplied to the tenant so that any matters of contention or debate can be eliminated. This process will usually involve solicitors acting for both parties. The process can slow negotiations substantially and therefore should not be left unchecked. Many transactions have fallen through because of the debate or disagreement between solicitors.
Strategy is everything in a lease negotiation. As agent working for the landlord, you need to think like an investor so that the rental provided by a lease enhances the value of the asset sensibly over time. This means that every lease you negotiate impacts the value of the property. An experienced buyer of the property will also review the leases substantially when the time of sale arises. Think ahead and make your deals work well for a number of years.
So these are the major points of discussion and negotiation in most of lease situations. If you can breach through these it is likely that you will have a successful lease occupation agreement or something close to it.
In this commercial real estate sales market you need to find well qualified buyers effectively and quickly. As part of this process it is worthwhile to sit down with the seller of the property to brainstorm all the regional property activity and history that they have seen recently. You do this by asking specific questions at the time of listing.
Well directed questions give you a well directed property campaign. In many cases you can set your sights on a good channel of buyers by just taking some of the further steps below.
Local Market Intelligence
Certainly some of the local market intelligence you should bring to the seller as part of the property listing and appointment process, after all that is the main reason that they will hire you as the real estate broker or agent. Do not however overlook the market intelligence that the seller could have gained from owning the property and the business in the region for a number of years.
It is quite likely that these questions below will help you extract more ideas from the property owner and perhaps even highlight the ideal type of buyer that you should be targeting. After all is said and done, the seller of the property knows the property, the industry, the precinct, and its history better than anyone else. This then makes your job of selling the property all that much easier.
Key questions to explore to help find the right property buyer:-
Who has a similar property and possible expansion objectives in the area? – This should be all the local businesses in the precinct for the surrounding 1km.
What companies in the region have recently undertaken acquisitions? – Even in a difficult economic or financial market, some businesses are still going very well, so you need to look out for these growth activities or needs that require more property to occupy.
What companies in the area are highly active and quite profitable? Who or what are they and do they need more space in your precinct?
What are competitors of the subject property and its business? Do these competitors need more property to operate from in your area?
What established contacts have enquired regards other properties recently from other sale campaigns? Are they still active and could they look at the new listing coming on the market?
Who sells to the same customers that the subject property sells to? Could this be a channel of interested buyers?
Are any of the existing customers of the property vendor considered potential purchasers of the property today?
Are there any industry related executives seeking to move into their own property and run a similar business themselves?
From the above list, you will achieve an ideal profile for the property being sold and the targeted buyer that is suitably placed to purchase. Document the profile to the seller of the property and achieve mutual agreement on the profile before you start any campaign. You should be attempting to profile the purchaser with the following categories in mind:-
public or private company
private individual or investor type
target cash flow
From the above list, you can then match your property promotion to the buyer profile most easily. The sale of a commercial property and the location of a buyer is not just a function of advertising and waiting for enquiry. Gone are the days of advertising the property and waiting for the telephone to ring. In this market you have to make the telephone ring.
The most successful agents and brokers in this market are exploring many channels of property interest for buyers. In markets like this, it is the targeted market that you identify and how you tap into it that really matters.
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