The structure of a lease negotiation and tenancy placement is very much related to the financial requirements of the owners, so information is essential if those negotiations are to be successful. You need to understand what lease priorities exist for the client landlord and how those priorities will need to be integrated into the tenancy mix and lease models. You also need to know about the property and its ability to serve the tenants and customers into the future.
The Landlords Focus
In relation to lease documents, landlords are generally basic and particularly concerned with:
- The period of the lease
- The level of rent
- The type of rent
- The renewal of the lease
- Landlords costs to establish a lease
- Tenants make good requirements at the end of the lease
- Permitted use of the premises
- The frequency and method of adjustment of rent
You should take this further and be focused on the calibre of the tenant and the suitability of the tenant to other tenants within a building. This is the start of tenancy mix considerations and real strategy.
Good Leases are Essential
Some clients will overlook the essential terms of the lease and think that ‘any lease will do’. This narrow view is wrong and must be shaped to encourage good lease and tenant placement outcomes. Good tenant placements are supported by great leases. Underpinning this is a good solicitor who knows how to write a good lease that suits the needs of the property and its future for the client.
Choose Generic Leases or Great Leases?
First and foremost, if the Solicitors that are responsible for doing the leases for the property are not fully aware of the property in reasonable detail, it is wise to encourage them to inspect the property with you and the client so that all key issues and potential problems are identified for the client allowing the lease to be designed to suit. A great property and tenancy mix are supported by a great lease. Generic leases do not suit the purpose well because they do not relate to the special issues that the individual property needs or creates.
A final word on generic leases is that they are commonly used where the landlord (client) is trying to save money on legal costs. This is not a positive practice. A good lease matches the property and the client’s investment model. It then makes it easier for the Agent to undertake the leasing process and the tenant mix. All the key issues of occupancy are already on paper in the lease.
Features of the Property
Details of physical and other features of properties should be noted in your inspections so that you can build on the opportunities and positive aspects of the property with potential new tenants.
All the information gained should be included on an appropriate and organised listing form and recorded as both hard copy and as part of a computerised listing package. Ultimately you will be producing a leasing brochure and information package to present to potential tenants. All positive aspects of the property should therefore be well understood and documented.
All investors and owners of commercial property have differing investment and ownership needs. They could want the property to produce certain levels of growth or stability for their investment needs. They could also want to hold the property for a period of time.
These issues then lead to the core decisions that they will make when you locate a tenant or adjust the tenancy mix. It could be that the client has a preference to hold the property for a short period of time and then undertake a redevelopment or expansion of the property. This will have significant impact on how you would construct the tenancy mix and lease profile for the property. You may need redevelopment clauses or relocation clauses in the lease to give the client flexibility.
To handle these facts you will fully interview the client and discuss the investor’s property requirements before proceeding with any part of the professional leasing and tenancy services that comes with commercial real estate. You must match your leasing and tenancy services to their needs.
Your skill is in assessing the potential leasing and tenant balance of the property and then shaping the leases to support the rental income needs is essential.
What’s the lease impact and potential?
What size and type of rental can you get from the property? When looking at the potential return of the property from the tenancy mix angle, the cash flow aspects requiring future awareness include:
- rent review profiles
- lease expiries
- lease term
- rent types
- option periods
- outgoings recoveries
The more tenants you have in a property the more complex this gets. Lease elements such as these will affect the potential income from the property into the future. Look for the peaks and troughs as well as opportunities in tenant mix and placement.
Tenant Lease Events
You should explore the ramifications of all such tenant events, and all others in the relative property leases, so that the property is carefully prepared for any later sales activity, leasing opportunity, and all other future income opportunity. Seek to minimise major ‘dips’ in cash flow and the threat of vacancy periods.
The lease and the balance of all the leases against each other is therefore a big part of tenant balance and your service.
You would not normally want or have a number of leases falling vacant at or around the same time. This is only done when you want to remix or redevelop the property and hence the only way to achieve that would be through the creation of vacancies.
The best way to consider and construct the multiple tenant activities and plans in a complex property is to graph the tenants in a calendar or graph display. You can then see where you need to handle cash flow exposure issues created by lease vacancies and expirees. You can then give the landlord client some real logic in doing a certain type of lease at a certain time.