When it comes to commercial property investment, there are always different ways to handle rental income. The most important strategy to have sorted from the very start is a good lease.
Unfortunately it is the case that some investors cut corners on lease documentation (to save money) by using some generic lease that really doesn’t relate to the property and its configuration. The generic lease documentation becomes a problem when unexpected issues happen in the property such as:
- tenant default
- maintenance problems
- lease compliance
- permitted use pressures on occupancy
- market rental establishment
- rental reviews being calculated
- lease options being exercised
- risk and environmental matters
The quality of the property and the investment targets of the landlord should dictate quality lease documentation. That’s where the clients solicitor or attorney should get involved in creating the lease subject to property configuration and tenant selection. A lease of that nature does cost money, but think about the duration of lease occupancy and its impact on income generation.
So let’s say that you can get a quality lease created for any upcoming lease with a tenant and landlord. Special terms and conditions should be considered when it comes to the rental factors such as:
- rent review profiles
- longer lease terms
- market rental parity
- options for another term of years
- base rent and any turnover provisions
- property and or tenancy upgrades for the longer leases
- outgoings recovery as part of the rental structure
Look outside the square when it comes to future rental and show the client just how things will work and what the value of the lease will be to them over the lease term. The start rental for any lease is not as important as where the rental will head over the term of the lease. To understand that value you can do a NPV (net present value) analysis of the rental, the lease, and the lease term. What you are then doing is looking at the real value of the rental cash flow over the lease term. The number that you determine will help the client see the income they achieve in comparing transactions.
A quality tenant with a national profile or regional branding will also help the property with relevance in the market. If you have other tenancies in the same property, that relevance can underpin lease performance and minimise vacancy risk. On that basis choose your tenants wisely and place them in the property with the ‘bigger picture’ in mind.