When you manage or lease retail property or premises within a shopping centre, it can always be a challenge to find the right type of tenants for the vacancies as they arise. It is important to stay ahead of your vacancy problems and challenges within the tenancy mix.
If a tenant is nearing the end of their lease, it is simply a matter of them vacating the premises or a new lease being created. If you work 12 months out from the event, you can plan whatever steps are necessary to resolve the vacancy quickly and effectively.
Here are some tips to help you with finding tenants to lease retail property:
Monitor the activities of other shopping centres nearby. They will have some tenants looking to move or change premises for a variety of reasons.
Keep in contact with all the franchise groups through the region and nationally. They may be looking for new premises for another franchise tenant location. That being said, you will need to understand the lease requirements and lease documentation standards that apply to each franchise group. It is likely that the lease documentation will be different to that which the landlord would normally use.
Create a retail leasing property update newsletter. This newsletter can be circulated through the retail business community in your local area. In the newsletter you can provide tips and ideas regards leasing new premises. Given that most businesses have Email contact, a newsletter can be based on the use of an auto responder and an Email System.
Maintain regular contact with all the businesses through the local area. Have particular focus on the successful businesses with strong branding. Give them regular property updates so they can understand the changes in rental and incentives as they apply to retail property.
The anchor tenant in your retail property will have a significant impact on customer visits to the property and the trade for the specialty retail tenants. A good anchor tenant will also attract new tenants to your property. Encourage the anchor tenant to interact with all the specialty tenants in the shopping centre.
A shopping centre that is well maintained and marketed to the community, will be of attraction to new tenancies. Ensure that your property satisfies both of these issues. Establishing a productive marketing campaign to attract more shoppers to the property through all of the trading seasons.
When it comes to leasing and managing retail premises, early lease negotiations and preparation for any new tenant vacancy, marketing, and occupancy are key strategies to adopt. A retail property is a vibrant and yet challenging type of property investment. Work with your tenants at the earliest possible time, and you will find good results for all concerned.
The most important step in keeping your shopping centre or mall occupied is realising the total economic impact of having to re-lease the space.
Consider the effect should one of your tenants go out of business:
Can you find a replacement tenant?
If so, how long will it take?
Will you be able to achieve anywhere close to similar rental from a new tenant?
What will legal fees cost you, if you choose to go after the old tenant for leasehold performance?
What will leasing commissions for a new tenant cost you?
What will tenant improvements cost, plus an inevitable period of free rent?
Unless you have awfully deep pockets, you can’t afford substantial vacancy in your centre – so you can’t afford to ignore your tenants’ concerns.
Be willing to listen to their concerns. Tenant feedback can be most helpful.
Work on a new promotional campaign – with tenant input.
Does the centre need repairs? Paint or landscaping, for example? Consider the costs of repairs versus the cost of re-leasing should several tenants decide to leave.
Always search for ways to improve your centre. Strive to achieve the most dynamic tenant mix. If a tenant vacates, work hard to improve that space with a promotional tenant who will help the rest of the centre.
Finally, know your competition. If your centre is not competitive with those in the surrounding area and your centre management responds with complacency, the centre is doomed to failure.
When it comes to leasing a Retail Property or Shopping Centre, the tenancy mix is critical to the generation of income. When you have multiple tenancies, it is absolutely essential to make sure they all balance with each other.
One important fact of tenancy mix design is that like tenancies can complement each other in the same general location and encourage the spending of the shopper. Further to that, it is quite likely that complementary tenancies selling associated products to the same type of shopper will also work well together.
This means that you can put tenants together that all serve the same type of customer. For example this could be men as it target shopper, and in that case you could put together a series of tenancies within the tenancy mix including:
Men’s fashion shirts
Men’s golfing accessories
Men’s casual wear and jeans
This concept creates a cluster of shopping. Importantly it should also be softened with specific specialty shops of general interest to the broader family and not just men. For example you could place a number of coffee shops or sports drinks amongst the mix.
Tenancy mix is not difficult. It is just a matter of the type of tenancy mix and strategy that will serve the customer that typically visits the shopping centre on a regular basis. When the customer feels that they are well served in visiting the shopping centre, the number of return visits will escalate and the number of dollars spent in shopping will increase.
When it comes to retail property performance, the tenant mix is a critical part of the leasing strategy. Well placed and selected tenants will help you as the property manager build the customer experience for the property. The end result is a property with:
Low vacancy factors
Good levels of customer visits
Optimised market rental
Solid enquiries from the local business community for leasing
All of this means that the landlords property can perform well in the current economic climate.
Property managers and leasing managers should make the tenant mix strategy a key part of the annual business plan for the property. Some good ideas to merge into the plan would include the following:
Base rental levels around which new leases can be created
Types of rental that allow the landlord to recover a good part of the property outgoings costs
Standard lease strategies that set targets on lease terms, options or renewals, makegood clauses, rent review processes, rent review types, etc.
Strategies of tenant occupancy that support the anchor tenant in the property
Early renewal processes for tenants that are desireable for ongoing occupancy in the property
Clustering of like type tenants so you can build off the sales activity of each tenant
Tenant optimisation is a result of a great tenant mix plan and its implementation.
Landlords, tenants, and property managers are all part of the property performance package to underpin a retail property performance.
With commercial premises, the leasing process should involve ‘Agreements to Lease’ or ‘Letters of Offer’ between the tenant and the landlord. This enables you to negotiate the final terms and conditions of the lease quite effectively.
When the final ‘Agreement to Lease’ has been achieved between the parties, then that document can be sent to the landlord’s solicitor to prepare the final and original lease documentation. The whole process is clean and straightforward.
It is always desirable to let the landlord solicitor prepare the lease and arrange for the signature of both parties. Invariably solicitors come across smaller matters of dispute which still need to be resolved between the landlord and the tenant. The solicitors are the best ones to do that for the landlord.
Whilst all premises are unique and special, the following is a checklist around which the ‘Agreement to Lease’ could be structured. Simply then add other elements special to the property as appropriate.
The name of the landlord together with contact detail
The name of the tenant together with contact detail
Description of the premises including the reference to any plans or drawings
The area of the premises
The term of lease
The lease commencement date and the end date
Option for a further term if applicable and how that option should be exercised with due regard to timeframes prior to lease expiry
Details of contributions to outgoings expected from the tenant
Details of recoverable outgoings that are normally considered as every day consumables in the premises and how they are to be recovered from the tenant. This would be cleaning, electricity, communications, and energy.
Permitted use of the premises
Details of any incentive to be provided by the landlord
Details of the make good expected from the tenant at the end of the lease term
Car parking detail
Signage detail and approvals
Air-conditioning supply and hours of operation
Access details to the premises including a statement of how the tenant will access the premises at different times
Details of works to be undertaken by the landlord prior to occupancy by the tenant
Details of approval processes that need to be observed by the tenant in any fit-out works
Rent review structure and frequency
Details of the initial starting rental
Details of the guarantees expected to be provided by the tenant as part of the agreement to occupancy
Insurance obligations of the tenant
Confidentiality agreement between the parties
Any other obligations of the tenant to be undertaken during the lease term
Any other obligations of the landlord to be undertaken during the lease term
Special terms and conditions that need to be incorporated into the lease document by the solicitor prior to the signature an agreement of the parties
Obligations of the lease with regard to legislation current in your location or the property type.
This list should not be regarded as finite given that every property is unique and special when it comes to lease negotiations. The list will however give you the main things to look for in the first instance of lease negotiation, and to which you can add the other special terms and conditions of the negotiation in the ‘Agreement to Lease’.
Any lease or tenancy negotiation should include evidence of the condition of the current premises before they are handed to the tenant. At the end of the lease term, you will then know to what condition you expect the premises to be returned to. ‘Agreements to Lease’ are standard procedures used by experienced landlords and real estate brokers.
When you have structured a document that works well for you in your location with your property types, it pays to create a number of templates which simplify the task of leasing and negotiating. Generally speaking, the ‘Agreement to Lease’ is not legally binding but it will facilitate the negotiation and move you towards the creation of a real lease where the solicitor takes over.
The idea of lowering rents in a tenant mix strategy may not be a popular topic among shopping centre or shopping mall owners, but cash flow is still cash flow.
There is great value in communicating with your tenants and understanding their reality, as well as your own. Again, deal with each rental renegotiation on the specific circumstances of that lease. Know too, however, that a rental reduction, if necessary, may be recaptured in the following ways:
Percentage rent increase. If the tenant’s sales are off during a bad economy, presumably they will go up when times get better. The landlord can then recapture from a lower base rent via increased overage rent.
Deferred rent. If the tenant is having trouble, consider lowering the rent, with a deferred lump-sum payment at a specified date or on a stair-stepped basis to ultimately bring the rent back up to an acceptable level.
Term extension. As a trade-off for a reduced rent for a quality tenant, ask for a lease extension with gradual escalations. This will help assure long-term occupancy and profitability.
Advertising. Require that the tenant agree to spend a substantial percentage of any rental reduction toward advertising and promotion, in an attempt to increase sales.
When you list a property to sell or to lease you need to understand the type of lease that you are dealing with. There are definite differences in leases at all levels and hence a lease must be read fully before proceeding.
The better and more fully that you interpret a lease, the more professional you are and you appear to the people that you work with or serve. You can and should add strategic value in the client in every lease that you negotiate. A lease is not just a document to allow a tenant to occupy premises; it is a tactical cash flow that can attract or detract from the property.
The way that leases work will solidly impact on the property and its performance for the duration of the lease. As you deal with tenants or buyers for the property, the type of lease that applies will also impact on the negotiations. Let’s look at the main lease types and expand on the issues for you.
Under a gross lease the tenant pays a rent and the building owner will pay all building operating costs (also known as outgoings). This means that the lease itself will have rent review provisions that escalate the gross rent only.
In a lease of this type the landlord needs to know that they can maintain the building outgoings to predictable levels over the lease term. The levels of rent review escalations in the lease must be expected to cover or exceed the escalations in the level of outgoings over future years otherwise the landlord will loose money.
Gross leases are common in retail and office property. Your choice in using this rent and lease type should be balanced against the predicted levels of outgoings costs and future changes for the subject property. Obviously an older building will have steady escalations in outgoings above that of a building that is younger. As a building ages and deteriorates, the gross lease method becomes less attractive and more risky for the landlord.
Semi Gross Lease:
In this type of lease the landlord is setting a gross rent which is paid by the tenant and is reviewed over the term of the lease however the landlord also gets paid some regular money for outgoings under a specific calculation.
The landlord specifically recovers the escalation in outgoings above a nominated base year. This base year is selected at the start of the lease and is usually the last reconciled outgoings year prior to lease commencement, which is usually the previous financial year to the start of the lease (because it is fully reconciled and known as a set value).
As the new semi gross lease proceeds, the tenant has to pay the escalation of the outgoings above the nominated base year. For example, if in a lease the base year for outgoings purposes was set as the financial year 08/09 and the known level of outgoings for that year was $85m2 pa, then in the financial year 09/10 when the outgoings escalate to $97m2, the tenant will have to pay outgoings of $12m2pa. As the lease ages and in the financial year 12/13, the outgoings could be $108m2, and in that case the tenant will need to pay $23m2.
In this type of lease the base year is set and the outgoings ‘gap’ will likely increase significantly as the lease gets older. This type of lease is good for the landlord in that it protects the landlord against the escalation of the outgoings above the base year.
It is common in this type of lease for the base year of outgoings to be updated at the time of any market rent review. Market reviews in this type of lease would be done if the lease was lengthy (say over 3 or 4 years) and the landlord was concerned that they would be out of parity with the rent in the surrounding other properties of similar type. It is not necessary to do a market rent review at any particular time in a lease as the matter is negotiable at lease commencement, however be aware of the fact of re-setting the base for outgoings and the impact it will have on the landlord.
As a further interpretation of this type of lease you should look at the type of outgoings that are recovered in the calculation. It is not unusual for ‘lease savvy tenants’ such as the government to nominate the outgoings to which the base year escalations will apply. Naturally it is better for the landlord to recover the escalation in all outgoings in a building above the base year, however the government tenants are well known for limiting the calculation to rates and taxes escalations.
Clearly a lease is a product of a negotiation, but you need to understand what can be done and then get the best deal possible for your client.
The term net lease is firstly generic; hence you should be aware that there are 3 types of net leases within the category. So let’s look at them.
Net lease: In this lease the tenant pays some or all of the rates and taxes for the property or premises.
Net-Net lease: In this lease the tenant pays the rates and taxes as nominated in the ‘net lease’ method but they then also pay for insurance premiums for the property and premises.
Net-Net-Net lease: In this lease the tenant will pay for the rates and taxes, the insurance of the premises, and they will then also pay for repair and maintenance costs associated with the premises.
So what lease type is the best for the landlord? In most cases the Net-Net-Net Lease is the way to go, however it is a matter of if the tenant will accept and sign that type of lease. As a point of negotiation it would be wise in any Net Lease, or a Net-Net Lease to have a higher start rent for the landlord and better rent review provisions that offset the lesser outgoings recovery for the landlord.
Net-Net-Net leases are common on properties that are fully occupied by one tenant. This is method of lease structure is widespread in industrial property and office property.
This type of lease is more commonly seen in retail property as the calculation of rent is linked to the trading figures for the tenant. In most leases of this type the tenant firstly pays a fixed base rent that is geared to some rent review method, and then the tenant also pays additional rent that is calculated from their turnover or sales. As the tenant improves its trading, then the rent escalates.
An essential part of this lease structure is to force the tenant to give you accurate and regular audited turnover figures. The lease has to support and enforce the process for the landlord. Monthly turnover figures are the best way to go with the tenant providing the audited figures to the landlord by say the 7th of the next month. The landlord then charges the turnover rent to the tenant based on the audited figures.
This type of lease is also seen in new shopping centres as new tenants stabilize, in supermarkets for the same reasons, and in hotels or pubs. The basic strategy is to give the landlord some cash flow from the base rent from the start of the lease, and then to collect additional rent as the property and the tenancy becomes more successful in generating sales and customers.
Spell it out
In all leases, the recovery of rent and outgoings must be clearly set out to avoid debate and disagreement with the tenant. As you can now see, the selection of the lease type that you are to use on a property will significantly impact on the future for the landlord. It will also impact on any sales situation. It pays to know what is going on in the market regards lease and rent types so that you do lease deals that are similar to or better than the rest of the market. The right lease deals sell properties at better prices.
In retail 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 and tenants is so important given that the shopping centre and shopping mall 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 retail 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 retail 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 tenant and property 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 retail 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 retail 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 that 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 retail property industry and the property owners. They will likely hear about a retail property or lease transaction before you do. In many cases these people need the assistance of a good retail 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 retail 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 real estate offices are cooperative business environments with salespeople working productively with each other. This means that they share retail property 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 retail buildings and shopping centers 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 retail 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 retail real estate industry is relatively specialised and such cooperation is common in sales and leasing of 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 retail property and lease 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 retail real estate campaign and marketing event will have created leads and people that ‘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 retail 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 retail 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 retail 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 retail real estate and act professionally. If you can supply them with the source of a new large mortgage or retail property development, they are likely to offer you the opportunity for a retail 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 retail leads and listings.
The inventory above comprises the most obvious categories of leads and opportunities in retail shopping centre sales and leasing. 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.
The tenancy schedule is the tool of choice for a property manager or leasing manager in a commercial or retail property investment. It is the tenancy schedule that will keep the property manager up to task on forthcoming events and dates.
Often you find that the tenancy schedule is not up to date, so if anyone gives you such a document, treat it with the caution it deserves, and check it out completely before you act on the information contained therein.
So let’s say that you have a great tenancy schedule that you know is totally accurate. I get many questions about what I would want to see in a tenancy schedule. Here are my main priorities:
Details of the tenant name, lease, and full contact detail for emergencies
Tenancy identifier or suite reference that comes from the plan for the property
The area of the tenancy in m2 or ft2 (depending on your unit of measurement)
The % of the tenant area to the building net lettable area
The rent $’s per annum, per month, and per unit of measurement (m2 or ft2)
Lease start date
Rent start date
Lease end date
Term of lease
Option term of lease
Anniversary dates and reminders for rent reviews, options, expires, renewals, renovations, and make good obligations
Outgoings charges for each tenant on the basis of area and monthly charge
Outgoings budget for the building
Total outgoings recoveries for the property on a currency and % basis
Types of outgoings to be charged to the tenants
Insurance obligations of the tenant
Rental guarantee details or bonds held
Provision for critical dates relating to any important lease term or condition
Maintenance obligation details of the tenants
This list is not finite and you can add your own extra priorities, I would however make sure that it is totally correct and maintain it to the highest level of accuracy.
When you do this you can stay on top of important upcoming events that will impact the occupancy or rental of the property. Whilst you can buy ‘off the shelf’ software programs that display this above information, that can be quite expensive for those commercial and retail property managers that are first entering this type of property.
The alternative is to create some simple spread sheet that contains the data; in saying that, it is essential that great care is taken to maintain the spread sheet that you create. Any errors in the tenancy schedule can destroy your landlord, your business, your tenant, your reputation, and the property. Accuracy is paramount.
When assessing retail property tenancy mix, it is necessary to understand the financial factors that the property creates. In doing this, it is not only the financial factors today that you need to look at, but also those that have formulated the history of the property over recent time. In this case, the definition of ‘recent time’ is the last three or five years.
It is surprising how property owners try to manipulate the building income and expenditure at the time of sale; they cannot however easily change the property history and this is where you can uncover many property secrets. Once the history and current performance of the property is fully understood, you can then relate to the accuracy of the current operating costs budget.
All investment property should operate to a budget which is administered monthly and monitored quarterly. The quarterly monitoring process allows for adjustments to the budget when unusual items of income and expenditure are evident. There is no point continuing with the property budget which is increasingly out of balance to the actual property performance.
Fund managers in complex properties would normally undertake budget adjustment on a quarterly basis. The same principle can and should apply to private investors.
So let’s now look at the main issues of financial analysis on which you can focus in your property tenancy mix evaluation:
A tenancy schedule should be sourced for the property and checked totally. What you are looking for here is an accurate summary of the current lease occupancy and rentals paid. It is interesting to note that tenancy schedules are notoriously incorrect and not up to date in many instances. This is a common industry problem stemming from the lack of diligence on the part of the property owner or the property manager to maintain the tenancy schedule records. For this very reason, the accuracy of the tenancy schedule at time of property sale needs to be carefully checked against the original documentation.
Property documentation reflecting on all types of occupancy should be sourced. This documentation is typically leases, occupancy licences, and side agreements with the tenants. You should expect that some of this documentation will not be registered on the property title. Solicitors are quite familiar with the chasing down all property documentation and will know the correct questions to ask of the previous property owner. When in doubt, do an extensive due diligence process with your solicitor prior to any settlement being completed.
The rental guarantees and bonds of all lease documentation should be sourced and documented. These matters protect the landlord at the time of default on the part of the tenant. They should pass through to the new property owner at the time of property settlement. How this is achieved will be subject to the type of rental guarantee or bond and it may even mean that the guarantee needs to be reissued at the time of sale and settlement to a new property owner. Solicitors for the new property owner(s) will normally check this and offer methods of solution at the time of sale. Importantly, rental guarantee and bonds must be legally collectable by the new property owner under the terms of any existing lease documentation.
Understanding the type of rental charged across the property is essential to property performance. In a single property with multiple tenants it is common for a variety of rentals to be charged across the different leases. This means that net and gross leases can be evident in the same property and have different impact on the outgoings position for the landlord. The only way to fully appreciate and analyse the complete rental situation is to read all leases in detail.
Looking for outstanding charges over the property should be the next part of your analysis. These charges would normally stem from the local council and their rating processes. It could be that special charges have been raised on the property as a Special Levy for the precinct.
Understanding the outgoings charges for the properties in the local area is critical to your own property analysis. What you should do here is compare the outgoings averages for similar properties locally to the subject property in which you are involved. There needs to be parity or similarity between the particular properties in the same category. If any property has significantly higher outgoings for any reason, then that reason has to be identified before any sale process or a property adjustment is considered. Property buyers do not want to purchase something that is a financial burden above the industry outgoings averages.
The depreciation schedule for the property should be maintained annually so that its advantage can be integrated into any property sales strategy when the time comes. The depreciation that is available for the property allows the income to be reduced and hence less tax paid by the landlord. It is normal for the accountant for the property owner to compile the depreciation schedule annually at tax time.
The rates and taxes paid on the property need to be identified and understood. They are closely geared to the property valuation undertaken by the local council. The timing of the council valuation is usually every two or three years and will have significant impact on the rates and taxes that are paid in that valuation year. Property owners should expect reasonable rating escalations in the years where a property valuation is to be undertaken. It pays to check when the next property valuation in the region is to be undertaken by the local council.
The survey assessment of the site and tenancy areas in the property should be checked or undertaken. It is common for discrepancies to be found in this process. You should also be looking for surplus space in the building common area which can be reverted to tenancy space in any new tenancy initiative. This surplus space becomes a strategic advantage when you refurbish or expand the property.
In analysing the historic cash flow, you should look for any impact that arises from rental reduction incentives, and vacancies. It is quite common for rental reduction to occur at the start of the tenancy lease as a rental incentive. When you find this, the documentation that supports the incentive should be sourced and reviewed for accuracy and ongoing impact to the cash flow. You do not want to purchase a property only to find your cash flow reduces annually due to an existing incentive agreement. If these incentive agreements exist, it is desirable to get the existing property owner to discharge or adjust the impact of the incentive at the time of property settlement. In other words, existing property owner should compensate the new property owner for the discomfort that the incentive creates in the future of the property.
The current rentals in the property should be compared to the market rentals in the area. It can be that the property rent is out of balance to the market rentals in the region. If this is the case it pays to understand what impact this will create in leasing any new vacant areas that arise, and also in negotiating new leases with existing tenants.
The threat of market rental falling at time of rent review can be a real problem in this slower market. If the property has upcoming market rent review provisions, then the leases need to be checked to identify if the rental can fall at that market review time. Sometimes the lease has special terms that can prevent the rent going down even if the surrounding rent has done that. We call these clauses ‘ratchet clauses’, inferring that the ‘ratchet’ process stops lower market rents happening. Be careful here though in that some retail and other property legislation can prevent the use or implementation of the ‘ratchet clause’. If in doubt see a good property solicitor.
So these are some of the critical financial elements to look at when assessing a tenancy mix. Take time to analyse both the income and expenditure in the property before you making any final choices regards tenant strategy.