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How to do an Income and Rental Assessment in Commercial Real Estate Brokerage

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Not all commercial property rents are the same.

The income for a commercial Investment property will have a direct impact on the potential price that sale. On that basis the income needs to be fully understood and investigated as part of the preparation for listing.

(N.B. these ideas are also sent out to regularly to our friends in Commercial Real Estate Online Snapshot to help amplify brokerage results…. Get your access here)

Any agent or broker listing an Investment property should take the time to review everything that could have an impact on current and future property income. Look for the strengths and weaknesses that apply to the property income stream and the cash flow for the asset.

Strengths and Weaknesses

The buyers for any Investment property will always undertake a due diligence on the listing and the location; weaknesses will be found so make sure you understand where those weaknesses are and how to address them. They will be looking for things that will have an impact on property performance over time. Some problems in cash flow will have a direct influence on a negotiation for property purchase.

Rental Assessments

Here are some ideas to help you review income performance for the assets that you might take to the market for sale as an investment:

  1. The gross income for the asset in today’s terms will always be the starting point of an income assessment. Look at the actual volume of rental created from the existing leases and the tenants in occupancy. Understand the elements of cash flow that make up the income stream. Those elements will usually include rental, rental by type, outgoings, special licensed areas in the property, casual rentals, and permanent tenants.
  2. Look at the cash flow per month over a period of time. Understand the gross rental achieved each month over the last 12 months. There will be patterns to the income stream driven by the tenants in occupancy. If there are vacancy factors in the property to deal with, then that will have a reflection in the collective rental. Review the number of vacancies and the negative impact that those vacancies have on the cash flow for the asset.
  3. Understand the vacancy threat that maybe upcoming in the property tenancy mix. Some tenants will be leaving or relocating within the property, and on that basis you should develop a full understanding of how those vacancies will be handled. Some vacancies will be harder to lease than others.
  4. Property expenditure on a monthly basis will reduce the gross income to a net income. The age of the asset will have an impact on property expenditure and maintenance. Compare the expenditure in the property to other similar properties in the same location. Look at the averages, and in that way understand how your asset compares.
  5. Some of the rentals in the property would have been determined on a market rental basis. Compare that market rental to other properties of similar type in the same location. Is your property correctly rented, or under rented?

Simple strategies of investigation including these issues mentioned will help you fully understand the income stream for the investments that you sell, lease, or manage.

Different Income Streams

From the examples provided you can see that there are many different elements of income to look into and review. Some of those income factors can be improved over time, and that’s where the skills of a leasing and or property management specialist are quite valuable.

As an agent or broker, develop a comprehensive investigation process applying to the analysis of the income stream in any investment performance. An income checklist will be very useful as part of that process.

(N.B. these ideas are also sent out to regularly to our friends in Commercial Real Estate Online Snapshot to help amplify brokerage results…. Get your access here)

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10 Ways of Optimizing Rental Returns and Recovery in Commercial Property Management and Leasing

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Vacant office space requires real strategy

In commercial real estate brokerage there are many things you can do to help landlord clients with income and rental growth.  The principles and ideas behind income performance in any commercial or retail property investments are one or more of the following:

  • Stabilize rental cash flow
  • Improve rents over time
  • Improve property value
  • Lower the risk factors
  • Optimise the tenant mix
  • Address the impacts of any vacancy

When a commercial real estate agent understands how to do all of those things comprehensively, they can really provide some valuable services to the clients that they act for in their property market.

The processes are very specific; real knowledge is required when it comes to property improvement and optimisation; the income recovery process is part of that.

Let’s say you are looking at a property for a client for the first time.  Here are some ideas and bigger income matters to look into as part of assessing a commercial property investment and its performance:

  1. Market rental – Understand the levels of market rent for the property type and the location. Compare those figures to your client’s property.  Have due regard for property improvements and age.
  2. Rental income recovery – If you look at a group of tenants in a property, you can see many different rental recoveries. Make sure that all rental recovery methods are up to date particularly with rent reviews, options, and percentage or base rents.
  3. Incentives – If incentives have been given to a tenant for any particular reason, check out that process. Are the incentives accurate and up to date?  When do the incentives stop?
  4. Arrears minimization – In larger properties today there will be arrears issues to handle. Work closely with tenants to ensure that rents and arrears do not get out of balance or become too large.
  5. Licences for special areas – Some tenants can be given the use and or access to special areas outside of their demised premises but in the same building. The other areas will still attract a rent; the risk of that extra space(s) use will also require management under a lease or licence document.  The most common licences today in commercial investment properties will usually be that for storage, car parking, antennas, or cabling.  All of those things should be documented in a licence for which a reasonable rent is charged.
  6. Electricity recoveries – If the tenant is supplied with electricity from the building grid then the landlord will have a recovery process underway. Look for the recovery methods and understand how they occur.
  7. Cleaning and common area recoveries – If the tenant is using common areas or is having their premises cleaned as part of occupation then the recoveries will be relevant; they should also be accurate so check out the numbers and processes that apply.
  8. Signage rents – A tenant related sign should incur rent.  Signage rent is a valuable third income stream in a commercial property.
  9. Car parking – Tenants should pay for car parking and that rental should be aligned to the location and property type. If the building and car parking is in the center of the city, then a premium for onsite parking should apply.
  10. Outgoings recoveries – Depending on the rental type, outgoings will be a part of tenant charges and recoveries. Compare the outgoings recoveries by location and property type so you know that the averages apply.  A building with high outgoings will be harder to lease or retain tenants.

So there are many things to check out as part of assessing property investment performance and income optimization.  Are you ready to ask the right questions?