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Lease Strategies in Investment Sales

hen meeting with a property owner to discuss the sale of a property you should have a good practical knowledge related to established leases in the area. This includes the rents that are achieved in the local market. It is the rents and leases that underpin the performance of the asset as an investment. This knowledge will help you identify if the property is ‘lease attractive’ or ‘lease weak’ from the perspective of the buyer; it will affect your price, the target market, and the time on market.

The important point here is that for you to sell an investment property, you need to know the rents, how they work, and what should be the best rent structure for each property type in the prevailing market. Great rents and leases produce great investments and in turn produce better sales.

Given that leases and rents change with the business sentiment and economic environment, you are the real estate professional that can help the landlord with the best strategy for the long term. It does not really matter (within reason) what the start rent is on a lease, but rather its escalation over time should be the main focus in any new lease. That should be your strategic priority.

Rents are Unique

Rents are unique to the property type and the location, so even if you specialise on selling just industrial property it is very much the case that industrial property from suburb to suburb will vary in rent level, strategy, and type. You need to know how and why the changes occur. The more skilfully you can talk about that and package it to the client or the customer, the more professional you will be in the provision of commercial real estate services. When considering your competitive position that is what matters.

Variables

Rents can be gross or net by type and added to that will be the levels of outgoings that apply in each location. Outgoings in your property sale must be in parity to other properties in the location otherwise you will be trying to sell something that is different than everything else. Whilst that may be acceptable for your listing, you will have to identify why the outgoings are higher and why someone will want to buy a property like that.

The ‘golden rule’ here is that your market awareness on leasing is fundamental to your sales skills and value provided to landlords.

Some Rent Strategies

So let’s look at some rent definitions that you frequently come across.

‘Market rent’ is that rental determined by assessing a given tenancy and its location and with its size, and then comparing it to other similar tenancies. Care must be taken in locating other ‘market rents’ because they may have been established by alternate means such as CPI adjustment, Fixed % adjustment, Ratchet, or Cap and Collar. In that case they are not real market rents and are not useful in any rent comparison. – True market rent comparisons are generally not to be restricted or enhanced by Ratchet clauses (this stops the rent falling), or Cap and Collar limitations (this stops the rent rising too far or falling too far). These mechanisms do commonly exist in Commercial and Industrial type leases and tenancies. They are sometimes restricted by legislation in application in retail lease situations. Make sure you know your local legislation in that regard so that the lease rent escalation method is legal.

‘Base rents’ are sometimes used as a ‘floor’ rent below which the tenants rent would not fall. This gives some stability to the Landlords cash flow in a new lease occupation. In a new retail property development with unstable or growing levels of trade, this is a useful tool. A lease with a ‘Base rent’ is usually enhanced with a turnover rental provision or clause, so that the success of the tenants business and sales will lift the rent level. – This ‘turnover’ is structured by some calculation from the tenants monthly trade such as:

a) ‘The rent paid shall be the greater of the ‘Base rent’ or 10% of the lessee’s turnover for the previous month’.

b) In this scenario, the % may change and the method of turnover calculation may be revised at the anniversary of a nominated period. This is usually once per annum, and the adjustment for any extra rent (as a result of the turnover) above the base is calculated and charged.

Assessment of existing base and market rents and their possibility for future growth involves complete review and analysis of the tenancy schedule on a tenant-by-tenant basis. You need to cross reference the leases to the tenancy schedule so that errors do not ‘cloud’ your calculations. Growth in rent will usually be provided in a lease by one of the following mechanisms:

a) Structured review

b) Stepped increases

c) CPI review (or other index)

d) Market review

Leases are individually assessed for the benefit that they give the landlord from:

a) Length of term

b) Lease clauses

c) Options

d) Future reviews

e) Historical reviews (implementation)

f) Occupancy costs

Ford Transit Leasing – Renting a Transit

Ford Transit leasing is very popular, especially in Europe, where it has become the most popular light commercial vehicle, with over five million units sold since it was first introduced in 1965. This reliable, versatile vehicle is used for a number of different applications, both commercial and private, and can be modified to suit virtually any occasion. Here, we’ll go over some of the characteristics of the Ford Transit, as well as how leasing or renting one can benefit you as an individual or for your company.

Most of the Transits available on the market come in one of three forms. They are typically panel vans, minibuses, or pickups. A panel van is essentially any van with a chassis based on a family sedan type of car, and yet retaining a larger amount of cargo space than most sedans. This allows the vehicle to provide comfortable seating for up to five people, as well as a greater degree of cargo space. The minibus variety of Ford Transit allows more people to be comfortably transported, making it a great choice for outings, vacations, tours, and events. Pickup trucks swing the Transit the other way, and are designed specially for transporting goods (with a cab seating only a few people). The versatility available in Ford Transit leasing makes it a great choice for any type of occasion.

If you’re considering Ford Transit leasing, consider what purpose you need the van for. The three major options offer a full range of storage and transport options. On one end of the spectrum, if you need to focus on storage for objects and material goods, then the pickup variety of Transit is the best choice. If you need to transport large groups of people, the minibus variety is the solution. If you need a little bit of both, the panel van is a good compromise. The Transit is able to suit your particular needs in order to best serve your purpose.

Ford Transit leasing has become very affordable because of the extreme popularity of these vehicles. They are very common in both private and commercial applications, and there are specialized varieties for particular circumstances. For example, models with refrigerated interiors for transporting perishables are available. The Transit is designed to suit any given need, and they are very affordable cars. Regardless of what you need to move, the Ford Transit is there to help you move it.

Lease Incentives in Commercial Property

In leasing today and particularly commercial and retail real estate, it is common to come across the word ‘amortisation’. In brief, the word explains the concept of recovery of landlord incentive costs over the duration of the lease.

In this property market we need to attract tenants to the property and encourage a decision of taking out a new lease. In the case of new tenant occupancy, the landlord may choose to provide some incentive which could be by way of rent-free, a new fit out, or reduced rental. This is common when the market is in a downturn or slump and an oversupply of vacant space exists. In today’s market this is the case and will remain so for some time. The creative provision of incentives is part of the leasing process.

Get the incentive money back!

When such incentive activity is provided by the landlord, it is common practice to recover the costs of that incentive back to the landlord plus interest on the funds provided, and such recovery is to be structured over the duration of the lease. Amortisation is the process that achieves this.

This then suggests that any incentive, rental rebate, or rent-free period is not actually free. That is certainly the case, and an experienced real estate agent or broker will support the process and the economics of the lease deal to ensure that the landlords funded incentive is recovered in some way.

What do tenants want?

When the tenants ask for a new lease and some incentive as part of it, they do not expect to hear about the amortisation process and the economics behind it. They do not want to hear that the good incentive that they are to get in the lease deal is to be paid back whilst they are in occupancy. Let’s just say that the concept is known between the agent and the landlord and the recovery of the incentive is structured (added) into the rent profile and the rent review processes during the lease.

The tenant in today’s market thinks that the market is slow and in their favor, and on that basis the landlord has to do something that attracts them to the property. That is where the incentive becomes part of the negotiation. An incentive can be anything of value to the tenant, but is normally one of the following:

Rent free period
Rent reduction period
Cash paid to the tenant
Fit out provided to the tenant
Whatever the incentive used, it is up to the real estate agent to structure the rent and incentive process in favor of the landlord as part of negotiating the deal. At the end of the day, a tenant only wants to know about the premises and the total rental which is to be outlined in the lease.

It is the job of the real estate agent to ensure that the incentive is structured so that the landlord achieves the recovery of the outlay in incentive. The tenant doesn’t always want to know the exact detail of what you are doing in the rental commerce. They just want to know what they are paying for total occupancy of the premises on a monthly or weekly basis and how that rent will increase over the term of the lease.

In a quiet market with a saturation of available vacant premises, it is common for incentives to be very active and at times they will reach a level of 30% of the total of the rent paid normally under the lease during its term. In any new property project the level of incentive will go slightly higher to approximately 37% but in doing so the developer for the project will have written that incentive cost into the project. In such case the tenants will pay an inflated rent (as a face rent) to allow the developer to recover the outlay.

So how is it done?

So the rent and incentive commerce goes something like this. If the rent for the premises with no incentive being provided is $200 per m2 pa (apologies to those of you who calculate rent by the foot), and the incentive that is to be provided to attract the tenant to sign the lease is equivalent to an amount of 10% of the rent recovered from the tenant during the term of the lease, then the starting rent should be $220 per m2 pa. This is called a ‘face rent’. The rent without any incentive paid in the lease ($200 per m2) is called an ‘effective rent’.

Whatever the start rent is to be (face or effective), it will then be escalated by a rent review structure that is practical and fair in the market. Your good market knowledge is part of this lease rent assessment and decision. The landlord needs to know what is right and fair in the prevailing market conditions to attract tenants to the property. Extended vacancies are not a real strategy here and are to be avoided; even a lease that has a low rent start or a higher level of incentive, can be shaped to a better rent level over a few years and therefore be in line with market rent at a later time.

By the way, property valuers will always find out the type and amount of incentive that was provided to a tenant to entice them to take up a lease. The valuer will then remove the incentive from the value of the property as part of their professional valuation process.

In some cases a landlord will want (or try) to ‘hide’ the incentives paid in any lease from the valuer for this very reason; this ‘hiding process’ is common when a property is being valued for mortgage loan purposes. I am not saying that this ‘hiding process’ is ‘legal’, but rather it happens, and a good property agent will know about it and understand what the real rent for a property actually is (with the incentive removed). Financiers know about the mechanisms of incentives and how they are provided and documented, and valuers of property similarly so. Importantly the level and type of lease incentive in the market is known by all parties and is not exceeded unnecessarily.

How to do this?

In handling amortization of lease incentives, it can be done in various ways. Check with a local solicitor to ensure that you are complying with standards and legislation in your area and country. Here are some examples of how incentives are handled.

Some landlords choose to have the incentive repayment process added to the rent that would have normally been paid should an incentive not have been provided. In this case the tenant does not always understand that the rent has been inflated to recover the incentive for the landlord. Nothing is ‘hidden’, it’s just that the tenant pays a high rent for the premises.
Other landlords may choose to have the amortization of the incentive separately detailed in the lease document as a separate ‘charge’. In this case it becomes a separate payment of incentive rental each week or month and the tenant knows what it is for. The incentive is clearly seen by anyone that reads the lease and all parties know what is going on.
Other landlords may choose to have the amortization of the incentive documented in a separate agreement between the parties well away from the actual lease itself. This is usually done by way of a ‘deed’ or separate legal agreement. Given that the tenant signs the ‘deed’ they then know that they are paying for and of its existence. It is the other people that read the lease that may not know of the existence of the incentive. If this is the case, take particular care at the time of property sale as the potential buyer of the property will want to know the full commerce of the occupancy.
The important message here is to understand that incentives are active from time to time when you lease properties in a market that has an oversupply of space. Incentives are the way in which the landlord attracts an interest in occupancy. As a professional real estate agent or broker, it is your job to ensure that the full recovery of the incentives is achieved. The landlord should be shown that you are going to get all their incentive money back from the tenant over the lease term (not the lease option), together with a rent for the premises that is fair and reasonable in the market and location in which you work.