So exactly what is a good tenant in commercial or retail property today? It is such a simple question but the answer can be complex depending on the needs of the property owner or investor. Here are some ideas that can apply to the tenant selection process for your landlords:
- Will the tenant bring better profile to the property so a greater value or the tenancy mix for the property is improved? Choose ten that can improve your property. Where possible avoid tenants that are unproven or new starts to business.
- Is the tenant an anchor tenant that will improve the property for the long term? If that is the case you will need to provide a special lease that captures the tenant for many years and brings the stability you need to the tenant mix.
- The rent that the lease starts at is not as important as the rental growth over the lease term. This then says that you should think about how the rent can be optimized through rent reviews of different types. You should also know about the landlords plans for the property in the coming years.
- The rent type should be carefully considered. In most cases you will have to choose between gross and net rent and some variations of that. Market rental evidence will give you some benchmarks to consider in this process.
- The tenant may be able to give you evidence of earlier occupancy in other property; on that basis you can get a comment from the previous landlord or property manager to help you make the decision with the tenant today.
- Some tenants ask for lease incentives as part of considering and negotiating a new lease. The incentives if provided should be in balance with others offered in the market today locally. It should also be said that lease incentives when provided should be paid back by the tenant to the landlord over the lease term. You can achieve this process by calculating trends in expected market rents over the lease term and then load the rent review process to compensate for the incentives provided. In both cases you can calculate the net present value of future cash flows from the lease for deals with incentives and without.
- Some security or guarantee from the tenant is very important today. The process of 'Directors Guarantees' is not relevant or of great value. It is better to get a cash bond, or bank guarantee for the landlord to hold for the duration of the lease. If the lease is to include an option for a further term, then the guarantee or bond will have to be increased or reissued as the case may be. If the lease is to be assigned during the lease term, make sure that the new assignee gives similar or better guarantees to the landlord.
When it comes to commercial or retail property performance, the tenancy mix and the selection of tenant will significantly help the landlord's plans and targets. If the tenants, landlord, and property manager work together to a plan and strategy, the property will benefit.