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The Essential Role of Tenant Analysis in Sales

When looking at a commercial property for sale or selling, there are plenty of things to check, but at the top of the list will be the tenancy mix and the income stream supported by the mix. In a retail property or an office property with many tenants, there will be challenges in getting across all the issues in all the leases. Nevertheless, the review needs to be done.

In reviewing the rental income streams and the tenancy mix, you are looking for things that exist or could happen in the property that could change the property risk factors and balance of the income streams.

Everything is linked in any investment property and a risk analysis is a big part of knowing all the facts.

Risk Assessment

What is risk in an investment property? Here are some ideas to help with that:

  • Loss of rent and or arrears situations
  • Active lease incentives impacting the tenant mix and income streams
  • Poor quality lease documentation
  • Critical lease dates not addressed or actioned in a property
  • Low rents that don’t align with the property market
  • Higher or increasing vacancy factors
  • Weak tenants in occupancy
  • Imbalance in tenant mix placement and offerings
  • Downturn in sales or business
  • Lack of customers visiting the property
  • Anchor tenants are not performing well and not attracting customers

This list can be expanded based on property types, locations, and customer bases. It is wise to have a checklist approach to help check leases and the tenancy mix for any investment property being taken to the market.

Strategies to Review Tenants and Leases

So, let’s go through the strategies involved in and behind a full tenancy mix review and lease analysis of any investment property.

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  1. Tenant stability and quality – Not all tenants are suitable for longer-term occupancy in an investment property. That is why you should do a SWOT analysis of the tenant mix and a tenant retention plan for the property. Those documents can be merged into the property business and leasing strategy plans.
  2. Review all the lease and occupancy documents – Every occupancy is different, as will be the documentation to support occupancy. Ask about and inspect leases, licences, and all other rental situations. Bring all premises occupancies, storage, signage, car parking, and any other rental situation that creates income into that process. From that point, check out the occupancy documents, the dates and the covenants to ensure that the landlord and all tenants are doing what is required and described in the occupancy documentation. Give special consideration to maintenance and risk obligations on either party to the leases. Are there any factors of non-compliance or risk that evolve from the tenants or the landlord?
  3. Consider all lease term durations – short and long – Have you got the right tenants in suitable locations? Do some tenants need more or less space? You can consider where tenants should or should not be from those questions. Ultimately, you want all tenants to support the success of the property and the income streams (market rents) while lessening the threat of vacancies.
  4. Tenant mix dynamics – when you look at the greater tenant mix, you will have categories to consider ensuring that all property elements are working well. Start with the anchor tenants and then move on to the specialties, the franchise chains, and the merchandise groups. Ensure that they are all providing the property with stability and performance growth. Your focus is property stability.
  5. Any outstanding negotiations or lease matters – when you have a lot of tenants in the mix, you can have a variety of issues relating to occupancy that are active and need attention. When selling an investment property, those things need strategies set and resolutions in motion. As a special note, check out the situations and the potential arrears matters with any tenants that could be struggling. When you have active matters, get complete documentation and notes to support the progress to date and how things can be resolved.

All of these things can be merged into a due diligence process by any property purchaser. As an alternative situation, any agent and or broker should also do complete and comprehensive checks about the property, the leases, and the income streams before any investment property is taken to the market for sale.

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