Do It Yourself Retail and Commercial Property Management Tips

Managing a commercial or retail property is not easy and we should not presume that it is.  Commercial real estate agents specialise in it and bring many skills to the process.  There are however some people and property owners that prefer to manage their own property.

It should be said that the commercial property management process is both time consuming and demanding.  It requires knowledge and commitment on the part of the property manager or the building owner.  Any mistakes made in the management process can be severe and impact the performance of the property for many years.

Given all of these facts, some landlords still prefer to manage their own property.  That being the case, here are some tips and ideas that can apply to the process.

  1. Lease documentation will always be a key component of the commercial property management process.  It is the lease documentation that underpins the income from each and every tenant and improves the performance of the property for the landlord.  A commercial property or commercial tenancy without a good lease document can be a real struggle to manage.  In many such cases you will find that the control of the tenant and the recovery of income become much harder.  It is notable that some property owners prefer to avoid high documentation and legal costs when it comes to the establishment of a new lease.  You would think that the reverse would be true given that a good lease will underpin the performance of the property.  A cheaply prepared generic lease will invariably miss out on the important parts of property performance and tenant control.
  2. Income establishment and growth will be a part of the commercial property management process.  There are many different types of rents to consider when it comes to establishing lease occupancy from any lease negotiation.  In many respects, some landlords do not understand the differences between gross and net rental, and how those rental types can be optimized in leasing strategies.  That is why the commercial real estate agents specialise in this part of the industry and act for the landlords of quality properties.  A good commercial real estate agent can add significant value to a commercial or retail property over time.
  3. Vacancy factors will change throughout the year when it comes to a property of multiple tenants and variable occupancy.  That being said, the vacancy factors of a property really do need to be pro-actively managed.  That will usually involve some type of business plan that sets the targets when it comes to property income, expenditure, and redevelopment.  The vacancy strategy will form part of the business plan for the property and will also feature as a component of the tenant retention plan.
  4. Expenditure management is not simply a matter of paying the bills.  Expenditure should be budgeted at the beginning of any financial year.  The landlord for the property should approve the budget and timing of the major items of expenditure.  Municipal rates and taxes will form a large part of the property expenditure process.  Those rates and taxes will be a critical timing factor to consider in the property cash flow.  Setting aside sufficient funds for those larger expenditures is really important.
  5. Tenant relations should be maintained throughout the property management process.  Good tenant relations will always help future lease negotiations and rent reviews.  This is highly important when it comes to any retail property given that the tenant in such circumstances is relying on the business and the tenancy to provide regular income.
  6. Code compliance applies to building structure and building occupancy.  The codes in particular relate to occupancy standards, occupational health and safety, building usage, and plant and equipment.  As part of the commercial property management process, the compliance to codes should always be respected by the property manager and the landlord.  Any building that is found to be lacking in this respect may very well be shut down until the matter is rectified.
  7. Maintenance of the plant and equipment within the property should be established to a plan given the requirements of occupancy, the age of the property, and the recommendations of the maintenance contractors.  Cutting corners and delaying maintenance will invariably lead to property failure and the breakdown of plant and equipment.  Each year it is preferable to establish a maintenance plan relating to the essential elements of plant and equipment in the property.  That plan can be merged into the business plan for the property.
  8. Laws and legislation relating to commercial and investment properties will change from time to time.  For this very reason, it pays to have a very good property solicitor representing the landlord and checking for any changes in property legislation that can have an impact on the property performance and operation.

So these are some of the critical components of commercial property management today.  It should be said that every property will usually have other factors to add that are unique to location and occupancy.  For this very reason, the property manager undertaking the management of the property should be well chosen and highly experienced.

Common Sense Tenancy Mix Analysis in Retail Property

In a retail property today, the tenant mix is likely to be the ‘make or break’ factor in property performance.  A good tenant mix will help the property thrive and underpin the rentals for the property and the landlord.

So how can you get to know what works?  It is easy to see examples of tenant mix profiles in other properties and then compare them to your property.  Look for the situations that work and those that do not.

Clustering is one factor worth examining in other properties to see how they may handle the cluster concepts.  Whilst you are there, look at their vacancy factors and just how they work with them.

Competing properties will also have factors of tenant loss and relocation; that is a good source of new tenants for your property.

Here are some other tips that can help you in your tenant mix design and property business plan.

  1. Understand the local demographic of customers before you do anything else.  Are there changes in the local area that will impact the customer base now or in the next couple of years?  If so the factors will need to be in your business plan for the property. The business plan should be done every 12 months and reviewed quarterly.
  2. Undertake a customer survey in your property and in the surrounding area.  You will learn so many key things from that process.  Why do people shop in your property?  What would they like to see changed and why?  How often do people come to your property and on what days?
  3. Check out the existing competing properties in the local area.  In this way you will see the differences that their customers see.  Pay particular attention to the access and convenience factors with those properties before you look at the tenant mix internally.  If there is one thing that frustrates many shoppers it is access and convenience.  Can your retail property improve on anything that the other properties are struggling with?
  4. The maintenance of your property will be driven by property layout, customer visits, and building age. Retail property is one of the most costly property types to maintain.  That is why outgoings in retail are so high.
  5. The anchor tenant or tenants in your property are likely to be established on a long lease(s) with appropriate rent reviews.    The anchor tenant profile will help you lease the specialty tenant premises in the property.  Create sound relations with your anchor tenants so the customer targets that they have integrate to the overall marketing plan for the property overall and the general tenant mix.

A great retail property performance is a constantly moving target.  Over time you will be modifying your plans and strategies when new things are seen or the local area changes.  Get involved with the local retail businesses and shopping community; you will soon know what they are looking for.

Leasing Factors in Retail Property Today

When you lease a retail property or promote a vacancy to be leased, there is a fair bit of information to be sourced and set as part of the vacancy marketing effort.  When you are fully informed and prepared, the retail leasing situation is much easier and more direct.

A retail tenant will ask lots of questions.  They have a business to run and they need to know that the property can support their intended operations, marketing efforts, and trade.

The landlord that owns the retail property will have a lot to do with the overall success of the tenant mix and the levels of sales.  Inexperienced retail landlords can destroy a tenant mix and retail property performance if they do not devote the correct focus on balancing key relationships.

Owning a retail property is a special process.  The fine balance between the tenants, customers, property manager, and landlord should be protected and encouraged.

Some of the critical leasing factors in a retail property or shopping centre will include:

  1. Levels of rental to be charged should be fair and reasonable in keeping with the existing and prevailing market rents.   Far too many landlords set rent based on their need to finance the property or boost the property value.  An aggressive rent can ‘kill’ the tenant mix faster than you would expect.
  2. Types of rental will change from property to property but will include gross rent, net rent, and incentives.   All of these rent issues require decisions based on existing market trends.  Rental targets for the property should be set in the business plan for the property and be reviewed annually.
  3. Tenancy space details will include area of the premises and configuration.   Be careful in setting rent with narrow, long, and deep premises.  When it comes to retail rental, it is the ‘frontage’ of the premises that sets the rent and sustains the customer interest.
  4. Permitted use for the premises will be set based on the requirements of occupancy and the prevailing tenant mix.  Decide what types of tenants you really want for the vacant premises.  How will they balance the offering of adjacent and nearby tenants?
  5. Existing tenant mix details should be reviewed.  In doing that you can ascertain just what vacancies are coming up and how they will impact the zone of the property.
  6. Supply and demand for retail space will change in the local area during the year.  The impact of new property developments will also reflect in your market rental.  Keep in contact with the local property development office to understand the new developments that may be coming up.
  7. Car park information will include numbers of car parks and the access methods for customers and tenants.  When it comes to retail property performance, the function of the car park will be important for the future levels of customer interaction and trade.  In many respects, car parking today needs to be accessible, friendly, and secure.  Customers will soon turn away from a property if car parking is too difficult.
  8. Customer demographics and levels of trade will change throughout the year.  Ensure that you understand the typical customer that comes to the property and the reasons why they do so.  Those factors are likely to change throughout the year.
  9. Signage rules and regulations will apply to particular tenancies.  Any new tenant to a property should be suitably briefed on the signage policies that apply to shop presentation.
  10. Landlord works and property improvements will be important issues to the incoming tenant.  Exactly what will be provided to the tenant as part of the new tenancy lease?  Will the lease for the tenant require special modification and allowances for unique tenancy improvements?  What should happen at the end of the lease term with regard to premises make good?
  11. Services and amenities to the property and to the tenancies will be important.  All the expected facilities services and amenities should be well maintained and up to date.  A property that is neglected when it comes to the maintenance of these issues will soon become redundant from the tenancy perspective.
  12. Guarantors and the security deposit requirements will be parts of the negotiation process for the new lease.  Decisions will need to be made regards the types of guarantees required and the amount of security deposit.  These factors may vary depending on the tenant that you secure for the premises.
  13. Fit out design and specifications will be important when a tenant is identified for the premises.  Certain rules and regulations will be required to control the tenant during the fitout construction phase.
  14. Outgoings and occupancy charges will have an impact on the tenant’s ability to trade.  Review competing properties in the surrounding area to understand exactly the types of outgoings that are acceptable in the prevailing market conditions.  Your property should be competitively positioned and not exceeding those charges in other properties.
  15. Standard lease terms and conditions will vary from property to property and landlord to landlord.  Those lease terms and conditions should be set prior to the premises being marketed.  The landlord should consult with their solicitor to ensure that a good standard document is ready and available for use when the tenant is located.  In most cases, the standard lease document will be modified for the existing tenancy and the requirements of occupancy.  If you locate the franchise tenant for the property, it is likely that they will bring their standard lease to the negotiation.  If that is the case, the landlord for the property will require legal assistance to shape the franchise tenant lease into something that works for the landlord and the property investment.
  16. Property as built drawings will be very handy when it comes to tenancy negotiation and tenancy design.  The as built drawings would normally be available through the property management office and or the landlord.  The drawings will be required to help the tenant to understand tenancy design and the availability of mechanical plant and hydraulic services.

So the leasing of a retail property or premises within in a retail shopping centre will be quite a specific task requiring detailed information.  When you prepare for the process of retail property leasing, negotiations can run more effectively and positively.

Retail Tenant Leasing Needs in Shopping Centres

woman shopping in fruit stall
Retail leasing is a key part of your tenant mix strategy.

When you lease a retail property or shopping centre, understanding the retail tenant’s needs will help you significantly when you try to close a deal or lease.  Retail tenants are quite special when it comes to occupancy; you need to know a lot more about them that the average office or industrial tenant.

Here are some ideas to help you work with retail tenants and fill vacant tenancies in your property:

  1. They will have an ideal shopper demographic for their goods and services.  What or who is that shopper and do you have plenty of them in your local area?  Is that demographic changing in any way?
  2. You may find that the retail tenancy is part of a franchise group structure.  That can be a good thing because the tenant coming into the premises will have an established business plan and retail support.
  3. What shop size will the retailer require?  Will that shop need to be on a corner point, internal to the shopping centre, or on a higher foot traffic zone?  Some retailers have to be in particular areas to make their expected sales.  That being said, a successful retailer will bring other shoppers to the area and help boost sales for tenancies nearby.
  4. What improvements will the tenant require in the shop?  Some of those improvements could be a landlord expense to get the tenant to commit to a lease.
  5. Visit some other shopping centres in the local area so you can understand just how successful some tenants and brands are in trading and in established tenancy mixes.  Look for the synergies between tenant types and locations.
  6. Each established and experienced retailer is likely to have a series of lease requirements that they will negotiate with the landlord for each property. Some of those terms and conditions will be non-negotiable as they have an impact on the way the tenant does its business.  Get a copy of the standard lease conditions that the retailer believes are critical to their business.
  7. The common areas within a retail property may add to the sale potential for some tenants.  A food court is a good example of this synergy and need.  Visit some other food courts or similar areas and understand what works and why.  If a customer can spend more enjoyable time in a property, they will likely spend more money.
  8. Presentational factors in a retail property are more important than in any other property type.  Retailers know when the landlord is cutting corners on maintenance to save some money. Eventually the poor property presentation will impact the customers and shoppers coming to the property.
  9. Transport corridors and roadways will have an impact on the way people get to a retail property.  If the process of access is too hard, the shopping centre can lose trade fast.
  10. Public transport to or near your property will be a great advantage.  How do people get to your property now and is it efficient?  Be aware of intended changes to roadways and highways; one small roadway change can impact your property in a big way.
  11. Car parking is always important to retail trade and shopping centre success.  In some locations that car parking should be under cover and convenient.  How big is your car park and is it convenient for users or shoppers to the property?

As mentioned earlier, and as you can see from the information above, the retail property and shopping centre is a really special property in function and operation.  Lease the property carefully and get to know all the retail tenants very well.

Finding More Retail Tenants for Your Tenant Mix

girl shopping for CDs and music
Choose the best tenants for your tenant mix by checking out the competing properties and tenants.

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.

Lease Types in Retail Property

blur of people in a shopping mall
Understand the right leases in your tenant mix and shopping centre.

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.

Gross Lease:

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.

Net leases:

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.

 

Percentage lease:

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.

Retail Property Tenancy Schedule

woman reading a file
Go through the tenancy schedule in great detail and check it against the leases.

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.

Choosing the Right Tenant for the Retail Tenant Mix

woman shopping with bags
There are many steps to building a good retail tenant mix.

It is incumbent on any landlord to know his tenant’s business and how it will balance within the overall tenant mix profile. The landlord can then have a sense of how a lease deal can be made to ensure a long-term tenancy. The soundest economic lease agreement most probably will not be the highest rent agreement. Take the following steps when evaluating a prospective tenant:

  • Rent Capability: Question the tenant’s ability to pay the rent being negotiated. Be willing to move the tenant into a smaller or less expensive space if doing so is in both parties’ long-term interest.
  • Profit and Loss history: Ask for the tenant’s other stores’ profit and loss statements for comparative analysis.
  • Sales projections: Ask the tenant for the projected sales at your location. Do the numbers seem high or low in comparison with the per square foot sales of other categories like this in the centre or trade area?
  • Communicate: Establish a trusting rapport going into the tenancy. Handle relationships one to one so you hear of problems before it’s too late to resolve them.
  • Management strategy: Ask about the tenant’s management plan. Is he going to be an absentee owner, or a hands-on operator? Will his management team be able to weather a downturn in the economy or a direct competitor across the street?

Likewise, shopping centre management should continually evaluate existing tenants. Check their sales trends – are they up or down? If they are down, a meeting may be in order to address any existing problems. If your existing tenant has established a strong track record over a number of years, don’t lose him. Communicate. Again, understanding each another’s position will effectively maintain long-term tenancy.