Track the lease data that will help you negotiate
Typically, after your tenants have signed their first lease, they file it away and forget about it. But as a proactive property owner and landlord, you should be tracking the lease renewal date and other useful data, so that you have the facts at your fingertips when it comes time to renew.
Software programs, like the one we use at Transpacific, can track current operating costs for the premises, alert you to upcoming lease renewals, and provide information that includes the expiry date of the lease, current lease rate/sq. ft, size of the premises, payment history of the tenant, and any other notes that might help you negotiate.
Begin lease negotiations early with a full tenant profile
Begin negotiations with your tenant a minimum of 6 months before the lease expiry date, so that you have time to reach an agreement, or find a new tenant. If you have a large space, or a national tenant, you may want to start negotiations up to one year in advance.
First, determine if your tenant has an option to renew, and if they intend to exercise that option. If your tenant has missed the date to exercise their option, you can still choose to negotiate the renewal, but you are not obligated to renew.
Second, consider the desirability of your tenant. What has their payment history been like? How have they maintained their premises? Have they been a good tenant overall?
Is their business expanding or contracting? Rather than lose a tenant, you may want to relocate them elsewhere in the building, or to another one of your properties.
One issue that we’re seeing more of lately is whether the business operations of the tenant affect the insurability of the building. That’s why we always consult with our insurance broker to determine if a tenant’s business will make it impossible to insure the building, or if a significantly higher lease rate is needed to offset a higher insurance rate.
Ensure you pay only your agent’s commission, not the tenant’s
We have seen changes to the Real Estate Services Act in BC in recent years and “dual agency” (a single agent representing both parties in a real estate transaction) is no longer allowed. Tenants must be advised of their right to be represented in a leasing transaction, and further advised of the risks of not being represented.
Historically, the landlord paid the agent’s commission, because the agent was also representing the landlord, but now, should the tenant choose to seek representation, the tenant pays for that representation, not the landlord. Be aware that some leasing agents still try to get the landlord to pay the commission, but landlords should hold their ground and evaluate on a case-by-case basis whether or not they will pay a commission.
Ensure your lease makes good business sense
Trained commercial property managers are skilled at reviewing leases and understanding their terms and implications. At Transpacific, we oversee the lease renewal process for our clients and review each incoming Offer to Lease to advise them how the lease could affect their building. Our goal is to ensure that each lease transaction makes good business sense.
Careful consideration of the terms of a lease can make a big difference to an owner’s bottom line. This was the case recently, when we assumed management of two older properties. The wording of the leases for both properties was inconsistent in defining what the tenants were responsible for. One lease stated that it was a Gross lease, but also that the tenant was responsible for operating expenses. The lease indicated that the tenant was responsible for paying taxes, but did not specify that they were property taxes. And, when one of the properties was purchased, the tenant estoppels differed from the lease terms. (It is quite common for tenants to indicate that they have a “side deal” with the landlord, but often this is not the case, or not verifiable.)
The lease rates were also substantially below market by up to $15/sq. ft. In one case, the Gross rent being paid was barely enough to pay for the operating costs of the unit.
To remedy the situation, we conducted a property market survey for both lease rates and operating costs – and we had the properties accurately measured to ensure the landlord receives all of the rent-per-square-foot they are entitled to. (The new measurements will also include unit layouts, which will help with leasing efforts.) All of the leases are being converted from Gross to Net leases, and the renewals will be at market rates. The clean-up will take from one year to 18 months, but when it is complete, the landlord can be assured that all of their operating costs are being recovered and their lease rates are at market levels. This, in turn, will increase the value of the properties.
Advice from your property manager can help you negotiate
Your property manager is in a unique position to assist you in the renewal process due to their training, familiarity with the market, and knowledge of your tenant. After dealing with your tenant during their previous lease, they should have a good understanding of their operations and their approach to business in general, and be able to give you useful advice on what to include in negotiations, and where you can negotiate to your advantage.
They can also serve as a buffer between you and your tenant, and remove any emotion that arises as a result of the negotiation. At the end of the day, landlords are looking to build long-term relationships with their tenants – and your property manager can help with that.