In real estate brokerage, the industrial property market offers good levels of entry and activity. Why is that so? It is because the property type is ‘entry level’ for investors both in complexity and cost. It is not hard for an agent to know what is going on in the industrial market place and get the facts of what a property investor in that segment may be looking for.
The aspiring brokers and agents that are starting up in the industry will find it easier to understand industrial property first and foremost. From that point other property types can be incorporated into market activities and prospecting.
From a career perspective, and to help you get started in industrial property sales and leasing, here are some ideas:
The industrial property market is usually the first to respond in an upturn and a downturn. Watch the shifts in the economy to capture the market changes and listing opportunities.
Businesses centred on manufacturing and bulky goods usually need larger premises to operate from. They will chose locations that are relevant to regional raw materials, transport, customer demographics, occupancy costs, and business operations. This then says that a top agent in industrial property will spend substantial time getting to know the local businesses and what they are looking for in business operations, expansion needs, and locational change.
Some properties in this category can be tenant and business specific. If that is the case, any landlord should take care in structuring a longer lease with appropriate make good clauses at lease end. Also allow a reasonable lead time for a tenant making a decision on the exercise of an option. If the landlord needs to find a new replacement tenant for a highly specialised property, it can take some time to achieve the placement.
In this market segment, a top industrial property agent will work on both leasing and sales opportunities. One thing can very well lead to another.
With the predominance of industrial parks and the clustering of industrial tenants and businesses into the one location, there are special factors of knowledge that apply to the title types and the permitted uses under the leases. Get to know how these things work and can fit into the zoning and planning regulations for the local area.
Industrial properties will have configuration and improvement issues to understand. That will include hardstand, warehousing, office space, staff amenities, car parking, security, and loading areas. Use and configurations will change. Get to know what tenants and businesses are looking for locally in property choice and occupancy.
So this is a good market type to enter into as a commercial and industrial property agent. If you enjoy the market segment you can specialise for many years and achieve.
The customization of an industrial property is achieved through the integration of the real estate, its established and new property improvements owned by the landlord, and the machinery and inventory of the tenant. This relationship can occur as part of the lease negotiations between the tenant and the landlord.
If the customization of the plant and equipment is going to be extensive and elaborate, the terms of the lease will need to be suitably and carefully constructed. It is important to identify the different levels of plant and equipment that are owned by each party. The lease document is the place to do this.
If costs are to be incurred by the landlord in modifying the plant and equipment and to help the tenant in establishing occupation, then the initial property modification costs should be amortized across the lease term. Any money outlay by the landlord should be built back into the income recovery.
You can calculate the cost recovery alternatives through a discounted cash flow with appropriate rental recovery assumptions across the initial lease term. The rent reviews and the market rentals to be charged during the initial lease term can be modified for recovery of amortized costs.
Distinguishing the Differences
It is often difficult to distinguish between the plant and equipment owned by the tenant, and that which is owned by the landlord. For this very reason, any new lease should clearly detail the ownership factors and the maintenance factors that apply to the existing plant and equipment within the property.
The landlord may own some of that plant and equipment; however the maintenance may be passed across to the tenant as part of ongoing occupancy. The lease document is the way to detail this factor. It is then up to the property manager to ensure that the appropriate levels of maintenance occur during the lease term.
Clear definitions and relationships need to be set when it comes to leasing a complex industrial property with complex cross ownership structures of the plant and equipment.
Generally speaking, the costs incurred in establishing new plant and equipment within an industrial property will have some advantage in depreciation when it comes to taxation. Clear relationships need to be set between the tenant and the landlord as to the initial cost outlay and the application of depreciation.
Any property landlord should consult with their financial adviser before they make the final decisions on capital costs incurred in a new or established industrial property.
Industrial property needs to be well-positioned with due regard for transport routes and transport access. Look at the road configuration and proximity with due regard to heavy transport access and deliveries to and from the property.
Some industrial tenants and properties require access to raw materials and the labour market. This could involve public transport or ports, rail heads, and airports. Look at the access issues here.
Power supply with industrial tenants is particularly important as they usually have a high load demands and extended hours of electrical load. Can your tenants access the power they require easily? It may be necessary for you to talk to the power grid authorities and the tenants in this regard.
Can the tenants dispatch their product easily into the transport corridors and transport facilities within the state? This is particularly the main roads, airports, ports, and shipping facilities.
Is the property located in a recognised industrial area surrounded by good and busy industrial tenants? Talk to some of the other local businesses to see what they think about the local area.
Are there any unsold properties or an abundance of vacancies in the industrial precinct and are tenants and properties in high demand? Look at those vacancies and get details of the asking rent.
Does the precinct feature an abundance of investment type property or is there a balance of Owner Occupation in existence? Could other tenants in the area be looking for properties to purchase and get away from the rental or lease issue?
What is the ratio of floor area between the office areas to the warehouse? Is that ratio too high or too low given the trends of occupancy in the local area? This will be relevant to the type of property and the customers that they service.
What is the height of the warehouse between the slab and the underside of the steel frame supporting the ceiling or roof area? That dimension can oppose or restrict certain types of storage and/or access by transport vehicles.
What is the access to the warehouse area from the main road fronting the property, and how many roller doors service that access? Are those roller doors motorised, do they allow the entry of modern semitrailer vehicles? Is there a need for other access doors in the future and can they be easily installed?
Is there an abundance of good lighting, or natural lighting in the warehouse area providing good visibility?
What is the load tolerance of the warehouse floor for heavy vehicles, what are the dimensions of the floor surface slab and does it provide ease of access for loading vehicles and trolleys?
What are the dimensions between the supporting roof columns of the building? This will dictate the types of storage and pelleting load area which may affect any future tenant occupancy.
What fire prevention systems and security systems exist in the premises that will be relevant to occupancy?
Is the building fully compliant with health, safety, and fire regulations? It may be necessary for you to visit the local building authority to check this.
What is the external fabric of the building? Is it easily maintained, does it provide a quality appearance?
Is the internal warehouse suitably lined and insulated given the property usage that is expected?
Is the property flat and suitable for trucks and or loading? • Does the office area provide good quality presentation, services, amenities, and business environment which will support the tenant in their future occupancy?
Is there any asbestos in the building, and if so, is it documented and maintained within regulatory and legislative management practices?
Ask about environmental risks and threats from the property or from the occupancy.
Look at the local maps to see how the property fits into the location and the geography. Look for things that can impact property usage such as rivers and creeks that could flood. Look for slippage potential if the block is sloping or near steep areas.
What does the zoning of the property allow it to be used for? Check out the local development plans.
Has the block been filled or re-levelled? Get details of this. It may be necessary for a soil report to satisfy buyers or tenants as to property suitability for their operations.
So you can add to this list based on your local area and the types of industrial tenants that you deal with. Formulate a checklist from this and the other things that you can add. As part of the inspection process, take lots of photographs of the improvements and the property itself. Loading areas and turning areas for trucks will be of real importance to many property owners, as will hardstand space in the property.
When you work in commercial or retail property, you will find that leases feature as a critical part of property performance. On that basis you really do need to know how to read and interpret leases; they will impact property sales and investment performance.
Having been a specialised real estate agent for many years and worked on many large properties, I have used a checklist model to help me read leases and interpret them prior to selling or analysing the tenant mix in the property. Here is the start of my checklist and some of my main items I look for. You may use it or add to it as required given your local property market and the property type.
Get the up to date tenancy schedule to cross reference against the leases
Review the original leases plus any supplementary amendments or alteration documentation
Chase down any licences or deed relating to occupancy and tie those to the leases and relative tenants
Have a copy of all the latest tenant rent and outgoings invoices so you can see what they are paying now
Understand that all rent reviews and options in the property have been correctly processed and that you have been given the latest correct documentation regards that
Know who the tenants are and the contact detail. Does that information cross reference to the leases?
Tenant names and business structures
Tenant identifiers or suites
Area occupied versus lease plan description
Plans of tenancies and access details
Plans of the property and relevance to tenancies
Common area proximity to tenants and impact
Options coming up and method of implementation
Rent reviews coming up and the type of review
Lease expiries coming up and the threat to vacancy levels
Current vacant tenancies and details of asking rents.
Outgoings payments under the leases
Recoverable outgoings under each lease
Market rent structures versus fixed and percentage or other types of rents
Insurance risk matters for the tenant and the landlord
Permitted use in the leases and current compliance
Make good obligations for the tenant
Handover strategy at end of lease
Landlord obligations written into the lease (and current compliance)
Tenant obligations written into the lease (and current compliance)
Inspect the property as part of understanding the leases
So this list can go on but it will give you a good start with some of the key things to look for with tenants and landlords leases. Remember that every property is unique and on that basis should be individually reviewed. Expect the unusual and look for it.
When selling commercial or retail property to the investment market as a real estate agent, it is very much the case that the existing tenant mix and lease profile of the property will impact the sale timing, strategy, and the eventual price to be obtained. So if you are a salesperson specialising in commercial or retail property, you should get very familiar with lease analysis and interpretation. Here are some of the things to be reviewed in a lease prior to any sale strategy implementation.
Types of tenants and relative stability. Are they the types of tenants that a purchaser would see as adding value to the property
Anchor tenants in the property and how much more time they have on their lease
Tenant mix around the specialty tenants.
Vacancy history in the property and any current vacancies
Rent reviews coming up and the types of reviews. They may improve the landlords cash flow and hence the value of the property.
Options coming up and the timing relative to sale. It sometimes pays to get these things done before the sale marketing commences.
Any lease incentives that are still current and that may drag on the landlord’s cash flow. It is best to get these out of the way before sale.
Recovery of outgoings in the lease and how they improve the landlords cash flow will be a factor in the sale.
Make good issues and costs could have an impact on the landlord or the tenant. Check the lease to see just who is responsible for remediating the lease at expiry.
Any supplementary rents and income should be identified. This can be licences for storage, car parks, signage, and similar income that improves the bottom line for the landlord
So if you want to sell commercial or retail property as a career, get used to reviewing and interpreting leases. It is a skill that will improve your chances of winning the landlords confidence and the listing. You can get more information about lease analysis at http://www.commercial-realestate-training.com/
In tenant advocacy, the real estate agent works for the tenant and has them as the client. This is a deliberate shift from the normal work that a real estate agent will do with a landlord in letting vacant space. Most particularly tenant advocacy is a real and significant service for corporate businesses that require relocating.
In normal circumstances corporate tenants consult with their solicitor to assist them with the lease and relocation process. In real terms, the solicitor will usually know nothing about the property market and only becomes useful when legal documentation is to be prepared.
The tenant advocacy service is therefore a specialised offering for the corporate customer requiring new premises. In this market, as we adjust to a new commercial real estate cycle, the movement of businesses and corporate tenants is becoming more frequent and will remain so for the next couple of years. The corporate real estate customer will be looking to seize the opportunity of new premises at realistically lower rentals. At this point in time, landlords are still under pressure to find tenants in many locations. This produces lower rentals, higher incentives, and tenant favourable lease documentation.
Tenant advocacy, as a specialised service offered by a real estate agent to a tenant, effectively costs the tenant nothing when handled correctly. This is because the real estate agent provides real savings through market intelligence and negotiation skills. The tenant pays for those skills through commissions. They get the expert they require for finding the new premises.
For some property agencies, this is a significant shift in mindset; they would normally work for the landlord. This can also provide difficulty if they work for landlords in a smaller precinct or real estate market. In a larger property market it makes no difference.
If you are in a smaller property market, or are worried about the impact of working for tenants specifically, the best way forward is to appoint a specialised staff member who will focus only on this tenant advocacy market segment and therefore not cross over to the landlord client relationship. Conflict of interest is therefore reduced, although it should be said that the tenant as a client should never be introduced to a property that is listed with your real estate agency from the landlord client relationship.
In commercial property the handover of premises is a critical time to take note of important issues and matters requiring attention. These notes can later support the tenant or the landlord in any matters of debate or dispute. There is a handover and the beginning of occupancy and again at the end of the occupancy.
In all respects the occupancy of the tenant and the premises handover should be in accordance with the lease. This says that you as a property or leasing manager must read the lease and understand it. Even in a single property with many different tenants, the leases can be different and usually are. The ‘make good’ clauses and the ‘handover provisions’ of the lease are unique and should be understood relative to each tenancy.
Taking photos also is part of the documentation of premises at handover time. It is recommended that the photographs taken are date and time stamped in the camera, and the photographs are later saved as ‘gif’ files and not ‘jpg’. This is because ‘gif’ files are a more stable and fixed format that cannot be manipulated by software editing tools such as ‘Photoshop’. If you want the photograph to be evidence of something important, then the ‘gif’ format is a reliable choice.
Whilst every tenancy is unique, let’s set some rules to give you some benchmarks to work with at handover time. You can then add some other matters that may be applicable to the location or property that you work on.
Take ‘gif’ format photographs as evidence of important things and levels of presentation
When taking photographs it pays to put a scale reference such as a ruler into the picture
Take notes of any comments or agreements from any parties to the lease
Check all walls and painted surfaces for damage and or current condition, taking photographs as appropriate to record the current condition
Check ceiling tiles and t-bars for ceiling presentation and integrity
Look above ceilings for the satisfactory removal of any unnecessary cabling that should have been removed
Check all floor coverings for any damage or deterioration beyond normal ‘wear and tear’
Look for any floor or wall penetrations that exist or need to be remedied noting that any penetrations must be fire rated to the standards of the local building codes.
Check air conditioning function and note any need for air conditioning balance due to fitout or altered or installed partitions in the leased space
Check lights and light switches for function and safety. It may be necessary to replace all tubes in the light fittings as part of the make good provisions of the lease
Check all doors and locks for safety and security. Do not overlook the need for doors and locks to comply with all building codes. All keys to the doors should be provided or returned as appropriate. If a master key system is installed in the building then check that the keys all comply with the master system
Check windows for function, security, and safety
Check electricity supply to the tenancy and any metering of consumed energy
Check the installation and compliance of any signage for the premises and that such is in accordance with architectural rules set for the building.
Look for any matters of change to the structural integrity to the building and the premises
As part of the checking process it sometimes pays for the landlords contractors to inspect the premises and provide a full report of any complex or sensitive issues. This will support any later legal dispute over make good terms and conditions.
When keys are exchanged between the tenant and the landlord, or the landlord and the tenant, a receipt should be obtained as a record of handover of the keys. The real estate agents actions in the handover to any tenant should also be supported by notes. It is surprising how many disputes arise later when you least expect it; in such case your notes are invaluable.
Never hand back any bond money or bank guarantees to tenants until you are absolutely certain that all make good requirements of the lease have been satisfied. It is also of note that all make good must have been done at and before the expiry of the lease; it is not something that is done after lease expiry.
Efficient make good and handover procedures are a critical skill for the real estate agent to develop and implement on every lease situation. You can see more about this on our website here http://www.commercial-realestate-training.com/