In commercial property today it is common for vacancies to develop in the tenant mix and property. This presents an ongoing problem for the landlord with the cash flow projections and income from the property.
Extended vacancy factors in commercial property are to be minimised where possible through planning and lease management. You need to know what to look for in a tenant and how to find them.
A good leasing manager or property manager will add significant value to the leasing process and the stability of the tenant mix. They have the ability to tap into the local tenant enquiry and read the requirements of tenants in this market.
When vacancies occur there are major costs to find another tenant. Here are the main ones:
- Loss of rent
- Loss of outgoings
- Costs of new lease documentation
- Costs of new lease incentives
- Commissions and fees to fill the vacancy
So how can you fix this? You can simply develop a tenant mix strategy and a lease management plan. They become a key part of the commercial property management processes provided by the real estate agency.
To implement these strategies you must know what to look for in a new tenant. The following list will help. You can add to the list subject to the needs of the property and the plans of the landlord.
- The tenant should in the first instance qualify as a stable business with an established history of operation. Get some details from the tenant regards the business history. This should be provided by the accountant acting on behalf of the tenancy.
- Talk to previous landlords from other properties that they have occupied. See if there are any problems of occupancy or defaults under the terms of the leases in the property.
- Speak to the property manager in the last property they occupied. Ideally the property manager should give you a positive assessment of the tenancy operation in their earlier lease.
- Develop a clear understanding as to the occupancy demands of the tenancy and the business. Will that business clearly fit into the property and vacancy you have available?
- The permitted use for the new tenancy should be clearly defined to specific tenancy usage. This will help you in any new lease situation or assignment or sublet.
- The new tenancy should not conflict with any existing tenants in the building. This can be by type, operation, or customer profile.
- The new tenancy and the lease term should suit the landlord's investment plans. On this basis, the term of new lease should suit the age of the property and any expected renovation or relocation activity that may be required.
- The new lease to be created should be balanced against any other lease expiry and adjacent tenancy in the same property. Ideally your new lease expiry should avoid any adjacent leases expiring at the same time; and therefore creating a heavy burden on the income for the building and the landlord.
- Get details from the tenant regards the intended fit out layout and construction. It is likely that you will require plans and drawings from a tenant to fully understand these factors. Any changes to building services as a result of tenant occupancy can be very expensive.
- It is wise to get some form of bond or bank guarantee as part of the new lease occupancy. It is common for this amount or guarantee to reflect between three and six months rental occupancy costs.
- The intended lessee for the new lease should be a legal entity that can be correctly described on solicitor prepared lease documentation.
- If the subject property is financed through a mortgagee, you may need the approval of the mortgagee to the intending tenant and the actual lease to be created.
These are some of the main issues to be considered when finding a new tenant for the property. These items can be structured into a checklist and added to as part of the lease or property management process.