Lease Negotiations

A

Apollo

My strip office has been on the market for 18 months. Fortunately it was under lease for most of that time but I have not received any income for the past 5 months. It has been advertised at $24k. I have received an offer from a prospective tenant to pay $18000 pa from January (5% return), but I need $22000 pa to cover my costs. Also he only wants a lease for 2+2+2, whereas I would prefer 3+3.

I suppose I could get a review to market after 2 years but it does not put me in a very good bargaining position, because he could walk away knowing that I don't want to have an empty property for months.

My main priority is security of tenancy and to cover my costs.
Would you suck it up or play hard?
 
Maybe offer rent-free period as long as he pays $24,000 p.a? I would be very wary of accepting a low-ball lease on a commercial property (particularly an office) because only the rent determines your property value....without a high rent, your property is not worth much at all.
 
Apollo, are you now running with a new agent as I recall you were going to move a few months back?

As for the price, that is a considerable drop (approx 25%) from your advertised price. As Aaron has stated, by lowering the lease you are effectively lowering the perceived value of the property over the next 6 years (based on a 2x2x2).
The advantage of going for the initial 2 year term (as opposed to your 3) will give you the option of a market renewal to bring it back into line if you decide to accept the decreased rent.
Do you have much competition in the strip (area)? What type of business does the tenant operate? Is it a start-up with more risk as that would certainly lower the poor offer already made.
I guess it all comes back to if you can afford to hold onto it for a little longer until another tenant comes along.
From my (very limited) experience with negotiating leases, we have found that most will negotiate on the term and any possible rent free period but generally NOT the advertised price.
I think at the very least if the holding cost is the killer for you, I would be focusing on the $$ and then working on negotiating back from that on terms and rent free period if you are desperate.
FYI: You probably already know this but if you offer a rent free period, make sure it's only based on the first term as you may offer a great rent free period thinking they'll stay for 6 years but they end up skipping out after the first option..:(

What is the agents view on the offer?

B.D
 
What have you have done in order to attract tenants? Could more have been done?

If you are going to take the $18,000 pa offer, then only do a 2 year lease with clauses advising that you are allowed to show potential tenants through at set periods.

No option unless they are willing to pay the advertised price and even then only one term with 12 months notice from the tenant advising you that they will not be taking up the option. No advise option is considered as the option being taken up.

No rent free unless full advertised price is paid.

Further, ensure that you have a minimum 4% yearly increase and a market review at the beginning of any term.

Make sure your make good requirements are well spelt out.
 
Bird Dog, I have the same agent as before. At least he is local and knows the area. He has been proactive in following up leads, the problem is the lack of demand in the area for office accommodation. There are few offices available for rent but they tend to remain empty for long time.

I would prefer not to drop the rent but it is only serious offer I have had. The tenant is a local accountant who wants larger premises after 9 years in the same place. I suspect he may be looking to buy his own place so he does not want to commit long term.

The agent thinks the offer is poor but I am the one who has to pay the loan so 80% income is better than 0%.

I have had the property for 3 years, the first 2 years were a dream with a (small) positive cash flow. But it has since turned into a nightmare and I am wondering if this investment is a dud. I guess I will not know for a least 10 years if it has been a good investment.
 
Chilliblue, the property has been advertised on RealCommercial.com. It has had lots of views (833+). The agent has sent emails targetting local businesses. There a road sign, a window sign and I have paid for a luminated neon sign hoping that a prospective tenant would like to take over the sign for their business.

Thanks for the advice re terms. In SA, tenants are guaranteed up to 5 years initially ie 2+2+2 or 3+3. I will definitely insist on 12 months notice of not taking up option so I have time to look for someone else.
 
Good luck getting 12 months notice on exercise of option, on a short lease you'd be lucky to get them to agree to between 6 & 3 months prior to expiry.

One thing you might do is to accept the 2 x 2 x 2 but have a annual increases @ cpi then market at yr 3 (ie mid-term rather than at the end/start of the lease).
 
Scott No Mates said:
Good luck getting 12 months notice on exercise of option, on a short lease you'd be lucky to get them to agree to between 6 & 3 months prior to expiry.

One thing you might do is to accept the 2 x 2 x 2 but have a annual increases @ cpi then market at yr 3 (ie mid-term rather than at the end/start of the lease).
Click to expand...

Why do smaller commercial owners lock themselves to such negative behaviour when it comes to negotiating leases?

A 2 + 2 + 2 lease locks the landlord for 6 years but the tenant only to 2 years. That means that the tenant has only to plan 2 years worth of future when the landlord is wanting and has tied themselves to a long 6 years of occupancy.

My stand is never to accept any options and if as a smaller landlord you do, then only accept one option term.

The tenant will not walk away from the deal if they are genuinely wanting to stay at the property for the full term.
 
You say it is advertised at $24k and that you need $22k to cover your expenses.

What is the market rent for the premises? This is the only really relevant figure.

What you need is totally irrelevant, what you want is also unfortunately irrelevant.

Are market rents declining, staying level or rising in this location?

Ask the opinion of another commercial leeasing agent or pay a bit of moeny and get a valuer to tell you what the market rent is. When I was part of a business in the city afew years ago we paid a valuer to tell us the market rent prior to the lease renewal negotiations, well worth the $700 when you are leasing 300sqm for several years.
 
Maybe it's worth getting a valuation done on it for peace of mind. I had the commercial property we rent valued with a view to buy and was informed the market value rent was $34K annually (we are paying $36K so that's probably okay). The landlord actually wanted $48K originally though so I'm pleased we didn't cave in to it. He offered a rent free period originally if we paid the $48K but I refused.
 
RightValue said:
What is the market rent for the premises? This is the only really relevant figure.

What you need is totally irrelevant, what you want is also unfortunately irrelevant.

Are market rents declining, staying level or rising in this location?
Click to expand...

I agree but unfortunately, there is a difference between what is market rent and what you have to offer to attract a new tenant. New tenants now expect, and get, rent free periods, fit out and discounted rent.
 
Apollo said:
I agree but unfortunately, there is a difference between what is market rent and what you have to offer to attract a new tenant. New tenants now expect, and get, rent free periods, fit out and discounted rent.
Click to expand...

Tenants have always expected rent free & incentives Apollo. Market conditions dictate how much you give away.
 
Nothing's for free Chilliblue - a fitout contribution is capitalised over the length for the lease, a rent freee is traded off for higher rent or better review conditions or longer lease term etc. The leasing merry go round.
 
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