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 industry
- target equity
- target timing
- target location
- 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.
You can get more on this strategy for finding property buyers here http://www.commercial-realestate-training.com
In commercial real estate and investment property your leads for new business come from a number of sources. The more leads that you can generate and optimise, the more successful you will be in getting the best listings. In this market, the quality of the listings is so important given that the buyers and the tenants can be so selective.
When the market is saturated with owners and businesses that are struggling to keep afloat, it is the quality properties that you want to market. These are the ones that will generate the momentum even in difficult times. The banks are also not as reluctant to lend on the higher quality asset with established cash flow.
Does this mean that you turn your back on poor and unattractive commercial real estate listings? Perhaps you should for this time given that you want results to your marketing. It’s your choice, but at the very least, be selective as to what you list and how you do it. Your time is your only resource and how you use your time is essential to generating fresh and marketable listings.
What are the Sources of Leads?
We cannot cover all the sources of commercial real estate leads here as they are unique to your market in many respects; however it is worthwhile raising the main common ones so that you can have them covered. Importantly you must know what a lead or source of new commercial real estate business looks like in its early stages, and then you must know how to convert it to fresh momentum and a deal.
There is one main rule on the topic of leads; when you see a lead, you must react to it in a professional and timely fashion before someone else does.
Leads in commercial real estate are not just for the things that happen today; they can be for things that are potential deals in months or even years. The more clearly you see this, the further business you will generate for yourself.
So here is the most obvious leads generation list that you must have covered in one form or another. See how you score on these items and make sure that these foundational matters are under control.
- Business Acquaintances locally – these are most particularly those people who you have known for some time and who are likely to cooperate as an extra set of eyes in the market place. Choose of these people with care and remain in contact with them constantly.
- Professional Business People – in your marketplace, there are a number of categories of business people to whom you must remain connected. The highest on the list are solicitors, accountants, town planners, financiers, architects, local politicians, and engineers. All of these people have significant involvement with the commercial property industry and the property owners. They will likely hear about a commercial property transaction before you do. In many cases these people need the assistance of a good commercial real estate broker to help their clients in a variety of ways.
- Local businesses – local businesses produce change and flux in the marketplace. As time progresses, you should constantly encourage ongoing contact with all the major businesses in your precinct. They are the ones that regularly need to buy, sell, and lease premises; this means all the local managers and business proprietors who are involved in property decisions and creating commerce generally in the community. Recognise that they do not normally know much about commercial real estate. You can bring them updates on rental and property prices regularly to assist them with a future property need.
- Colleagues within your office – many commercial real estate offices are cooperative business environments with salespeople working productively with each other. This means that they share leads and opportunities in sales and leasing. Sharing part of your commission with other colleagues in your office is far better than giving the commission to another outside competitor an agent in the same region.
- Building tenancy schedules – from time to time, you will see or obtain tenancy schedules or inventories that relate to major buildings in your area. Whilst they should be regarded as confidential documents, they will give you a wealth of opportunity if used correctly. Any lease that is to expire inside the next three years is a target for future contact. The relative tenant will need to do something to preserve the function and occupation of their business. It is surprising how many tenants leave such matters to the last-minute. The ongoing contact with tenants of this type is highly productive. Your main focus with these people is to establish trust so that they come to you when they need you.
- Competition agents and brokers – normally speaking, the competitor agencies in your area will cooperate on conjunction transactions with their exclusives. The commercial real estate industry is relatively specialised and such cooperation is common in sales and leasing of office, industrial, and retail property. Importantly, any conjunction arrangement involving other agent’s listings must have a completely signed and documented conjunction agreement before you proceed. Cooperate with other agents, but do so with care and professionalism.
- Satisfied clients – your agency business, if it’s been operating for a number of years, will have a significant list of established happy clients from previous transactions. It pays to keep in contact with these people given that most transactions in commercial real estate happen every 4 to 10 years. The satisfied clients are going to need your services again.
- Old campaigns – any commercial real estate campaign and marketing event will have created leads and people who ‘changed their mind’. All of these people should be on your constant contact register or data base. Feeding them regular market updates is essential.
- Other Agents old deals – as a further extension of this item above, you can also monitor the transactions of other competing agents in your area. Any transactions that occurred through other agencies over the last 4 to 10 years should be monitored for future re-activity. It is interesting to note that many real estate agents and brokers are lax when it comes to keeping in contact with others.
- Industry publications – any newspaper or industry publication in your area should be reviewed daily for information involving businesses relocating, expanding, contracting, or merging. It is surprising how so many agents overlook this obvious source of listing. These publications will also frequently name the key people in a business such as the CEO, President, or CFO. In all cases these business leaders go on your contact list and get a letter on a regular basis. Note that I said a ‘letter’ and not an ‘email’. In this high-tech world you want your correspondence to be seen and read; an email will not achieve this in most circumstances.
- Other agent’s signboards –when another agent puts a signboard on a property, it is imperative that you contact the other adjacent and nearby owners of commercial property in that street. These people are likely to have an interest in competing with the property that’s just come on the market. They are also more likely to use you as a competing agent whilst the other agent’s property moves through its promotional period.
- Financiers and bank managers – these people need property transactions for their business to survive. They are also receptive to working with professional real estate agents who understand commercial real estate and act professionally. If you can supply them with the source of a new large mortgage or property development, they are likely to offer you the opportunity for a listing or a sale with their clients in the future.
- Planning approvals – keep close to the local council or office of the planning committee in your region, as they constantly consider new planning matters. Some of these offices have minutes of planning approvals that are available for public scrutiny. Check out these minutes and follow through on the opportunities that you can see. The historic planning approvals over the last few years are also great sources of leads and listings.
The inventory above comprises the most obvious categories of leads and opportunities. You will be able to add to this as time progresses in your marketplace. Importantly make sure that you have these items well under control as the essential foundations of your business.
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.
As you promote, sell and then document the property transaction you will soon come across the fact and event of ‘due diligence’.
This element of the commercial real estate sale is very common and will be the subject of most contracts with the exception of the auction method.
As you would expect the process of due diligence can make or break a sale. For this reason it is wise to question a seller well in the listing stage of the sale to ensure that no ‘deal breakers’ or problems are hidden in the cupboard. Due diligence will likely find most problems on and with the property.
So what can be looked at in ‘due diligence’? Consider these:
- Due Diligence is simply a detailed checking process that is undertaken prior to sale and settlement by ‘experts’, to review all relevant data involved in the sale.
- Usually solicitors and/or audit specialists are the nominated parties to undertake the work on behalf of the purchaser.
- The concept of Due Diligence is that the sale and settlement of the property will only occur if the Due Diligence process is successful.
- On large commercial properties it is not unusual for Due Diligence to continue for days if not weeks. A special condition of the contract will allow this to occur.
- The process is undertaken under the strict control of the Seller. It usually occurs in the Seller’s property management office or at the Sellers solicitor’s offices, and is usually in a controlled environment (locked room). Only authorized parties are allowed into the room so as to preserve security and confidentiality of documentation.
- A good Agent or Broker will provide total support to the Due Diligence activity. Expect Due Diligence to check just about everything involved in the sale.
The five professional areas usually covered are:-
Expect questioning and document discovery to include the following:-
- Engineering: Includes verification that the property structures and building services comply with the Building Code of Australia and Local Government building Approvals. Questions will cover safety risks or non-compliance of structures, fire protection, air conditioning, electrical supply, hydraulics, lifts, escalators, and stand-by emergency power. Expect the questions to involve adequacy of structures, mandatory service compliance, remaining life expectancy, capital expenditure, and sinking fund requirements for future major repairs or replacements.
- Environment: Includes a wide range of issues such as identification and analysis of environmental and physical risks to the property or land and its use. Issues will include site contamination, dangerous goods and hazardous substances, asbestos, hazardous industrial waste, trade waste, storm water management, occupational health and safety, heritage factors, and statutory requirements.
- Finance: Includes all actions and dealings associated with property financing, review of taxation implications, substantiation of income and expenditure statements, arranging mortgages, financial analysis and modelling, company or entity investigations, plus all other supportive or related documentation.
- Legal: Includes all conveyance documentation, easements, permits, titles, contracts, leases, searches, incentives to tenants, site details, compliance with any legislative requirements, outstanding litigation, and any town planning issues.
- Management: Looks at any issues associated with ongoing asset management, facilities management, building management, lease management and negotiation, rent collection, arrears, financial reporting, insurance, car-park supervision, cleaning, pest control, landscaping etc.
Tenancy mix becomes very important in retail premises and properties of multiple tenants; that will be shopping centres of all sizes and types. A property that does not reach the needs or interest of a customer is going to fail. (NB – you can get more free retail tenant mix training in ‘Snapshot’ right here)
A customer wants to be well served in their shopping needs and feel good about it when they visit your property. Visit the competition shopping centre properties nearby to compare them to that which you are currently leasing. You must understand the other properties that you are competing against together with the strengths and weaknesses that they experience.
In reviewing these other properties you look at things such as:
- The entrance ways
- The car parks
- The flow of people
- The places where people stop and congregate
- The larger anchor tenants type and location
- Standards of signage
- Lighting internally
- Transport to and from the property
- The tenants that seem more successful than others
- The tenants that seem to feed customers off each other
- The amount of time that people spend at the shopping centre
- The busier days for customer shopping
When looking at these other properties it is wise to take selective photos of the things that may be relevant to compare to your property. You can analyse the photos later and revisit your ideas. Note that some property owners and managers will be sensitive to you taking photos around their property. Discretion is the rule here.
The only way you can underpin your rental and strengthen it is through a good tenancy mix. Given that the leases in premises are for lengthy periods of time, any mistake with tenancy mix will exist for years and frustrate the rent, the customer, the tenant, and the property. Hence you must choose tenants well and then place them with a lease that is in harmony with surrounding premises.
As parts of that process look at these issues in balance so that any concerns of tenant mix occupancy are removed and nullified. Understand:
- Income exposure at expiry
- Option exercise potentials
- Exclusive or Permitted uses in the leases
- Vacancy effects on other existing tenants
- Relationship building or conflict potential between sitting tenant types
- Know why tenants like or dislike your property
- Know how your existing tenants maximize their business operations at your property
If you follow these steps, you will be armed with the strategy you need to put you in the ‘driver’s seat’ as you implement a new leasing campaign and tenancy mix for your managed property. You will know the tenant you want and you will have the selling points to attract them.
You can get other information on this concept here: http://www.commercial-realestate-training.com