When leasing a commercial property today, it is wise to consider the longer term impact of the rental structure and the lease cash flow. The only time to optimize the return for the landlord will be through the negotiation of the lease.
Here are some ideas to help with the improvement of the rental returns for the landlords that you may serve. They can apply with vacancy management, property leasing and tenant mix strategies:
- Market rental – understand the trends of the market rental today in your town or city. Understand what the tenants are looking for by way of property location, size, improvements, services and amenities. The current and future supply and demand for certain types of property will place pressures on the levels of market rental. Diminishing supply will also limit the impact of incentives on market rental structure.
- Choices of rental – choose the types of rental that support the investment structure and targets for the landlord. Choices need to be made when it comes to net rent or gross rent; the difference being outgoings costs to the landlord over the duration of the lease. As part of the leasing process, understand the outgoings that apply to the particular property to be leased. Compare those outgoings to the prevailing market conditions and other properties of similar size and type.
- Rent review processes – remember who you are acting for as part of the lease negotiation. Negotiate the best rent reviews possible for the particular lease and the location. The tenants in lease negotiation may want to index the negotiated rental to movements in the consumer price index. That may however have little overall benefit to the landlord from an investment point of view. As the leasing expert, you can achieve reasonable balances between the rental demands of the tenant and the requirements of the landlord when it comes to rental structure.
- Outgoings costs – as mentioned earlier, the outgoings or running costs for a building can have significant impact on the rental structure and strategy. Maintain your knowledge and awareness of the prevailing market rentals for the property type. You can then advise the landlord of the comparisons with other properties of similar type locally.
- Supplementary income – as the words suggest, there are different ways to achieve further rental for the landlord. From one lease negotiation or transaction there are other rentals that can apply with a particular tenant. Those rentals can be separately structured for review and improvement over time outside of the main lease document. Those rentals could for example be car parking rental, signage rental, communication sites, and special licensed areas. They are sometimes called ‘third income streams’.
- Effective rents and Face rents – these words are commonly used when it comes to incentives in a lease negotiation. Effective rentals are those that are achieved where no incentives are supplied and exchanged between the parties. Face rentals are those that are achieved where incentives apply to the lease negotiation. The inference is that the incentive is a cost to the building as part of achieving a positive lease negotiation result. The cost of the incentive should be taken from the rental structure or agreed rental. On that basis a face rental is not the true rental for the lease negotiation, and therefore will discount the value of the building. A property should be valued on the basis of effective rents.
So the message here is quite clear. The time to optimize the rental returns for the landlord is at the time of lease negotiation. A skillful leasing agent can establish an attractive cash flow for the landlord over the duration of the lease.