Rent strategies really do matter when it comes to commercial investment property performance. The choices that are made regards rental at the time of lease negotiation will have a major impact on cash flow across the entire lease term. It is wise that the landlord carefully considers the best rental alternatives to suit the asset and current market conditions. That’s where a good agent or broker can help out.
There are different types of rental structures and strategies to consider and choose from. Some will suit particular property types and lease situations more than others. As the local specialised real estate agent, you can bring some real strategy to your clients when it comes to rental choice and income optimisation.
Here are some of the most common rental types and alternatives:
- Gross rental – Many tenants today will ask for a gross rental structure as part of the lease negotiation. In that way they are seeking to limit income volatility and stabilise the cash flow for ongoing occupancy. If a gross rental is to be used in a lease negotiation, then the level of rent should be carefully considered, taking into account current effective net rentals, and the levels of outgoings paid by the landlord as part of maintaining the property. Essentially a gross rental should be struck taking into account current effective net rents and outgoings as they apply to the particular property type.
- Net rental – The net rent for the property will be impacted by property outgoings throughout the year. The net rental should be in parity to current market rents. The recovery of outgoings should occur throughout the year to enable the landlord to reimburse themselves for occupancy costs. The payment of any net rental and the recovery of outgoings will be documented and established in the lease.
- Passing rental – The rental that is actually paid at any point in time listing to be a passing rental. When you investigate occupancy issues and tenants within the tenancy mix, it is essential that you understand the levels of passing rents and how relevant those rents may be to be existing market rents for the location and the property type.
- Rent Review strategies – When you have established a fair and reasonable gross or net rental, you will need to escalate that rental across the lease term as part of an investment strategy for the landlord. There are different rent review alternatives to use, and some are more favourable to the tenant than the landlord. Make the right choices when it comes to rent reviews as they may impact your client.
- Rental Incentives – As part of any lease negotiation you will find that rental incentives can be a point of discussion between the landlord and the tenant, and then reflected in the final lease agreement. Understand what tenants are looking for when it comes to property occupancy and the associated lease incentives. Prepare the landlord for the pressures of the incentive particularly if it has an impact on cash flow at the start of the lease.
As a final note, it is worth remembering that all rental types will be impacted by current market conditions, as well as the supply and the demand for property locally. Track and measure listing activity, negotiation results, and time on market for this very reason.