Common Problems With Commercial and Retail Lease Incentives

Common Problems With Commercial and Retail Lease IncentivesIn this current economy and the commercial property market, there are far more leases being done on investment property than sales. Sales are in most cases more difficult because of the restrictions on getting loans from the lending institutions and finding the right people who can qualify for a loan in today’s market.

So if you are a real estate agent you should not turn your back on sales, but you should focus on leasing property for a while. Brokerage leasing is the ‘bread and butter’ for many agents at the moment. In saying that, there are various types of property and sizes of tenancies that you can work on. You have some choices here so ask yourself these questions to find the leasing market that works for you:

What type of property is most popular for leasing at the moment? What drives the leasing deal today in your area? Where are the tenants coming from? What are tenants looking for in services, amenities, and incentive today? Where are the good properties to lease?

The part of the question 4 above raises an interesting topic of ‘incentives’. Many tenants will ask for them and expect them. Preparation is the key to handling them. The landlords that you act for should be prepared for them.

Incentives in leasing are in reality not ‘free’, as the landlord has to get back the outlay or cost of the incentive. That is why there is a ‘face rent’ and an ‘effective rent’. If you have an incentive in a lease deal then it creates the ‘face rent’. The difference between the ‘face’ and the ‘effective’ will be the cost of the incentive and its recovery over the duration of the lease.

Tenants do not know of this process normally and there is no reason explaining it. The only person that needs to know what you are doing is the landlord, so if an incentive is to be provided in a property or tenancy lease then the rent will reimburse them. On that basis every advertised rent at the moment should be a ‘face’ rent to give you the room to manoeuvre when then incentive is asked for.

You can get the incentive cost back through creative rent review profiles across the term of the lease. So you do not have to create a radically higher face rent at lease start (if you did it would make the vacant tenancy harder to market).

If you want to prove to the landlord that a lease deal is a good deal in today’s terms, and that you are getting back the incentive for them that they outlay, use an NPV (Net Present Value) spread sheet model to achieve the assessment of the time value of the lease both on a face and a comparable effective basis.

So the message here for you in this market is to find properties and tenancies to lease in sought after local property. Understand the prevailing rents in the market (face and effective) and then prepare incentive strategies for the landlords you work for. You can be the local leasing specialist.