commercial lease query

[graisme]

hi
can anyone enlighten me about this;

the owner of an unrenovated commercial building secures a possible tenant who wants to open a restaurant which would cost @$400,000 to fitout the building.

i'm assuming that with that sort of outlay, the tenant would expect the rent to be much lower than market rents and that the tenant would also want a ten year lease. wouldn't that therefore hold the value of the building really low for the length of the lease?

if a tenant spent that kind of money, when would the rent be expected to catch up to market value?

 

[Xenia]

A tenant would pay for the fitout. Why would you assume that the fitout would affect the rent? I would still expect market rent no matter what the tenant decides to pay in the fit out. The two are mutually exclusive unless you have some arrangement that links them.

sorry if I miss understood I just dont follow where the assumption that the rent would be below market value came from???

 

[Player]

Who would get to keep the fit out upon their departure whether end of lease or business failure? Would the facade be altered significantly or building shape changed to suit a chain restaurant and thereby limiting future attractiveness to another tenant?

A lower lease rate will affect property's value as you've mentioned. If the location is paramount to tenant's attracting patrons (such as a prime corner or high traffic strip), they should pay a premium for the opportunity and with such an expensive fit-out, I'm assuming it is well located. Just because they are spending such a figure what makes you think they will necessarily want a sweetheart rent period? Not saying they won't ask for one and with this climate everyone looks to reduce costs as much as possible.

To not impact down the track perhaps offer some rent free incentive with reversion to a more market reflective rental rate to bring building val back to reasonable levels.

I've asked more questions than I've answered Grace, however maybe some other more experienced commercial investors can answer along those lines also. I am unfamiliar with restaurant type assets and am also keen to hear the reply of others.

 

[PrimeCommercial]

i'm assuming that with that sort of outlay, the tenant would expect the rent to be much lower than market rents and that the tenant would also want a ten year lease.

That would be an incorrect assumption.
Commonly you find tenants asking for a fitout contribution and/or rent free period but the rent would still remain at martket rates.....in most cases

wouldn't that therefore hold the value of the building really low for the length of the lease?
if a tenant spent that kind of money, when would the rent be expected to catch up to market value?

All falls into place because the rent is at market rates. and the value is significantly determined by other terms of the lease.

 

[graisme]

thanks everyone. that's all good news. i had it in the too good to be true category.

it's a building i haven't bought yet which needs significant renovations so setting a market rent is pretty difficult. it is a very large space but over 2 and half levels.

as to the fitout remaining etc, that would all be subject to negotiation.

what prompted all this apart from the potential purchase/tenancy, is i my neighbour spent around $400,000 on fitting out the building next door as a restaurant but i know he pays a very low rent so i assumed that that is what usually happened. the only reason i know all that is because he expressed incredulation at the rent i was asking for for my building.

thanks again for all your help.

 

[grossreal]

hi graisme
couple of things
first the fitout stays with the owner of the building as soon as its fitted
its in my leases and must be in yours
simple reason is if the tennant defaults and you evict or a liquidator is appointed they will ask for the fit out to be removed to the street so it could be sold
this is then your cost and you can't claim it back or you are a unsecured creditor and this cost could and for a restaurant would run into thousands
with my leases anything attached, mounted or firmly secured becomes the owner of the build (me) at the point at which its secure mounted or fixed
I have a restaurant that is just being done at the moment and the same arguement is from the restaurant owner
so what we do
is we have a claw back system so its mine and it claws back during the lease to fully his
and then claws back to be mine so that at the end its mine anyway.
the lease is the same rent wise
and I have 5% annual increase
so a ratchet.
some time the owner does have to pay part of the fit out but if this is the case I get my designed to design and then my cost is reduced but increased on paper.
also I have net net leases so the tennant has to pay everything
I had a tenant ring yesterday asking why he had to pay the water board rates as well as the water charges including the reconnect cost

my answer was simple
read the lease.
I do reduce my start rents to get a tennant in because I want them to succeed but within 2 years they are above the other rents in the area in alot of cases so they are fine
hope this helps
1 very big bit of advice
when buying comm the most important part is the lease even if buy vacant the lease of the incomming is the most important part and does have to be done right and with that in mind do not
do it yourself
get a person that has no idea on the lease
or get the other side to draw up a lease
for me it would be cheaper and better to get some one like dazzling or what ever he want to be called
to fly from perth to sydney pay him for 2 months holiday and do the lease right

then it is to get a sydney person who as no idea
the flight and holiday option might sound funny but in the long run it would save you 10 or 20 times the losses the other way.
I can't stress how important that lease is I have seen lease that I just laugh at and have broken leases and redone them because they are just a joke.
but can be a very expensive joke if you design or buy it

 

[graisme]

gross real, thanks for taking the time to reply at length. your posts always have a lot of merit and are well worth reading.

i admit that i learnt the hard way with commercial leases. i don't do them myself but neither did i understand the implications of the way they were drawn up. while i would never try to do it myself, i have been trying to find sources that outline what you must/should have included. that way, at least i can instruct a lawyer properly.

do you know of any books/journals etc that have a reasonable overview of what commercial leases should include that are written in laymen's terms? the ones i've read are generalist overviews.

the fitout staying i know about. wish i had known about it before i got burned but it is all a learning curve.

could you please explain this bit;
is we have a claw back system so its mine and it claws back during the lease to fully his
and then claws back to be mine so that at the end its mine anyway.

how does a claw back system work (the nuts and bolts)?

do restaurants usually want 10 years because of the cost of the fitout?

thanks heaps, by the way, i'm in sunny, balmy, centre of the universe, victoria.
grace

 

[grossreal]

hi
thank goodness its shining somewhere
no nuts and bolts sorry out of my head and in the leases I have done
no books the books I read are about building mindsets not investing and have not got one on comm at all.
I like the ready fire aim approach the japanese call it kaizen
or plan do and review
so leases are in the planning stage
and I mirror so we review a lease change and re use it in another project so its evolving as we go
and thats not in a book
the slight edge you can read about a few of these ideas
claw back most accounts will be able to explain and is used when buying or setting up a business.
I try for 15 year ratchet leases
sorry can't be much more help but comm is a very small market for info as its a try and see market
but thats the way it is
and unfortunately I just don't have the time for a book

 

[HiEquity]

One thing that has helped me in this area is just to read lots and lots of leases. Agents readily supply them if you express an interest in a property that is on the market. They are public info anyway although you would otherwise have to pay to get them I understand from RPData or the like.

When you see a wide variety of leases and go through their terms in detail you can see what some LLs get away with vs what some tenants get away with. I have been struck by the massive variation in terms, possibly as a result of market conditions (among other factors) and which party was just more savvy when drawing up the lease.

I've been doing this for awhile now but am still learning lots about what's possible and what constitutes a good lease for the LL versus a bad one....

Got some way to go on that front I reckon!

 

[graisme]

hi equity; it's a good idea to ask agents for their leases. i've only been offered standard looking ones .....

grossreal; if you ever decide you'd like to do a book, i'd be very happy to scribe etc...! need in the market there, methinks......

 

[grossreal]

hi there
have a read of a post that on here about amway and read my post
if I was going to do a book or cd it would be via that system and it will come
not sure about it being in a paper version.
I have no interest at this stage in writing a book butI have a few that are investing with me and they maywell do that
I hope my latest adventure turns out to be as successfull as I think it will be. and I have made no hiding of the fact where I am aiming at.
yes understand leases and getting lot and understand them is the first step.
as for need
there is always a need for knowledge that market will never die.in a book not to sure
we live in a instant world
when instant coffee was made people did not realise that we are now in an instant world we want every thing today this minute this second and we can't even wait for a chicken to grow the 20 weeks we want it quicker.
we want instant everything.
if you go to a meeting we want an answer now
where as time is a very good thing to leave the coffee to brew
leave the client to stew
leave the bank to worry
and take time to get it right not instant
for me a book is a time thing
a cd is instant its put it in the cd player and listen
so the coins in the air on that for me and I don't think it will land before I am kicking up the daisies.
I work on negotiating in hrs not weeks so I understand and have to work in the instant world
and for me time is very under rated commodity
as you can't get it back.
and this is the reason that I say get some one that understands the leases fly them from anywhere in australia to set it up and you save all that time of doing it yourself
yes it is good education but only if you wnat to do leasing for rest of your life
or its wasted time and knowledge if you don't
I plan do and then check so I have to understand the leases from the check point of view and using the rear view mirror.
it a half a dozen one and 6 of the other for me pay some one to do stuff you don't want to do
but just get the best you can to do it
may be talk soon

 

[Fuzzboy]

graisme,

In commercial property leasing deals, once you understand the terms of the lease, the best way to work out which is financially the best deal for the landlord is by calculating what the net effective rent or the NPV is. This takes into account rent frees, fit out contributions, etc by amortising these costs over the life of the lease.

So no matter the terms of the deal you can work out which is best for you.

E.g. what is the better for the landlord:

Deal 1 - Rent $100,000 p.a. increased 5% p.a with fit out cost of $25,000, 10 year lease term

Deal 2 - Rent $75,000 p.a. increased 7% p.a with 3 months rent free, 7 year lease term

Just a quick example, the variations can go on and on, but you can essentially workout what is the best deal in any circumstance or situation.

 

[PrimeCommercial]

Every lease I've seen in shopping centres includes a 'defit' clause to bring the site back to the state it was at handover.
I'd say just one of the many differences between a retail lease and commercial lease

 

[grossreal]

hi all
defit is no point if the tennant does a runner or goes into liquidation as yoiu still have to defit