How to Prepare for a Commercial Property Lease Negotiation

Staircase with marble landing and balconies
Prepare comprehensively for your commercial property lease negotiation

If you have had a bit to do with tenants in leasing any commercial or retail property you will know that they can really delay things for their own reasons, thereby impacting the landlord in negotiation and slowing the agent as to finalizing the deal.  As the leasing professional your job is to work with that challenge and encourage agreement to the benefit of the client.

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Understanding the tenant’s situation now and applying that requirement to the current property market will help you with activating and progressing the lease deal.  That then means a better negotiation.

The tenants focus?

Good questions and research will usually help you to get to the tenant facts and motivators.  As you move through that, don’t forget just who your client is in the process and how you are representing them through the process of leasing.

Here is an interesting leasing based question for you. Can you believe what at tenant tells you about the property lease requirements that they have?  Perhaps not totally, however you can ‘read between the lines’ of what the tenant is saying and doing, and get to some of the real facts of what is happening in their business world.

A good outcome?

A good lease negotiation is generally a result of the leasing broker informing the parties to the deal, then discussing, listening, and seeing through the challenges.  Though all stages of the inquiry, inspection, and meeting process you can find out more of the tenant’s requirements and priorities.

So what really goes on in a lease negotiation?

The balance of any lease negotiation will shift and change based on just how much available space may be in the property market at any point in time; you have to prepare for that variation.  It directly follows that you should be prepared for any and all of these tenant ‘delay’ tactics:

  • Looking around at other properties
  • Comparing rents across the market and between vacant premises
  • Comparing properties and the improvements
  • Incentives to sweeten the deal
  • Slowing discussion to make a decision
  • Wanting to change lease conditions
  • Asking the landlord to do some internal fit-out works
  • Seeking early access to the premises before documents are signed
  • Fit Out approvals slowing
  • Plans of the fit-out not available

There are many variations as to what a tenant will be looking to do with a lease negotiation.  As the professional, you are to guide the process and negotiate through these barriers and many more.  Control and research are the keys to any successful commercial property lease negotiation.

Leases Really Matter in Selling Commercial Property

city buildings on river edge

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 affect the 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; an agent or broker for a commercial property you need to be the ultimate strategist.

commercial office leasing system
How to find more tenants for commercial and retail buildings.

 

Know These Leasing and Tenant Mix Facts

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 if they expose the property owner to volatile cash flow changes.
  • Lease expiry dates – these are always a concern if the property requires stable cash flow, so look for multiple lease expiries that are close to each other, and also that may consist of a majority of the lettable space in the building.  Understand the cash flow in the property before the sale process starts.  What tenants should stay in the property at lease expiry?  Will you need to fix those occupancy facts before sale marketing?
  • 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.
  • The 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.