Commercial Lease Negotiation Tips

Discussion in 'Commercial Property' started by Ampers, 22nd Mar, 2019.

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  1. Ampers

    Ampers Active Member

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    Hi tips and tricks on negotiating a new lease?

    This is a first for us. It is 200sqm industrial space. Very typical tilt panel construction type place.

    The thing is this unit hasn't been leased for at least 3-4 years. Its perfect for us(location) but its a rather unpopular spot to others. As such many units have remained dormant for years(Perth down turn)

    Also is it possible to do 1 and 3y ear lease arrangement? Were not %100 sure if our first year is going to be successful. Thanks
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

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    • Are you going through a leasing agent?
    • The owner may or may not be under pressure to accept just any deal
    • Has the unit previously been leased?
    • Do you have big set up costs? (Plant, machinery, Development approval, Health Inspector, Bond store/customs requirements etc)
    • A short-term lease followed by a longer lease (option) only equates to the term certain ie 1 year, so don't expect any incentives for the first term but if you get creative put the incentive into the option term ie you get a rent free period after you enter into the option period so the owner gets their full 12 months rent for the first term. Let them know that the incentive will only apply if you take up the option.
    • Rent reviews - capped at CPI
    • Gross lease (you don't pay other outgoings except water usage)
     
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  3. Ampers

    Ampers Active Member

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    Hi Scott.

    • Are you going through a leasing agent?
    Ray White are the agents
    • The owner may or may not be under pressure to accept just any deal
    Yes. I guess if they can sit on it this long they must have some kind of tax strategy
    • Has the unit previously been leased?
    Once approx 3 years ago
    • Do you have big set up costs? (Plant, machinery, Development approval, Health Inspector, Bond store/customs requirements etc)
    Relatively speaking were pretty small fry. Setup costs approx 30k(Computer Gear)
    • A short-term lease followed by a longer lease (option) only equates to the term certain ie 1 year, so don't expect any incentives for the first term but if you get creative put the incentive into the option term ie you get a rent free period after you enter into the option period so the owner gets their full 12 months rent for the first term. Let them know that the incentive will only apply if you take up the option.
    Thanks for this info! Do we use a broker for this?
    • Rent reviews - capped at CPI
    Is this pretty standard in a down market?
    • Gross lease (you don't pay other outgoings except water usage)
    Ive seen the outgoings for others of similar spec in this area and they seem to be approx 8k. Of course im not sure what that covers(case by case) but i feel its fairly standard for this area of Perth.
     
  4. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Anything is possible but it's what everyone agrees to in the end that matters. Ask for everything and then negotiate down especially if there are other units you can also offer on.

    If it has been empty for awhile then they will probably consider the 1+3 but they are unlikely to offer any rent free period or fit out. You most certainly can ask. It's a good idea of @Scott No Mates to put that stuff into the option term as that is a win-win for both of you.

    CPI index is quite normal. In the past year CPI for Perth has been extremely small and under 1% and can even go negative.
     
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  5. Ampers

    Ampers Active Member

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    Thanks mate. Sounds like i need a very good agent. Regarding the rent free period/fit out... im going to assume(probably incorrectly) that franchisee type setups have more of a shot than a tiny startup?
     
  6. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Have they shown you a proposed lease? or are you filling out a offer to lease to start negotiations before leases are drawn up?
    Generally the longer the lease term the more like you have of getting a fitout contribution and rent free period. It is regardless of what type of business you are.
     
  7. Ampers

    Ampers Active Member

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    We haven’t yet approached them yet outside of calling but here is the place. 365 Sevenoaks St, Beckenham. Your thoughts? Because of the high vacancy rate I believe they have left some off the market to give the impression of a full location.
     
  8. UrbanPlanner

    UrbanPlanner Well-Known Member

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    First step would be to ask the agent for a terms sheet - that at least gives you a starting point and you can make amendments from there. As others have said, anything is possible in a commercial lease, it's just a matter of the landlord agreeing. Basics, like a gross lease (so you know exactly what your occupancy costs are), increases capped at CPI, are all good suggestions. Since you only want a 1 year initial term, it'll be hard to get any rent free/fitout/cash contributions until you're ready to sign a longer term lease.

    Don't be afraid to offer well unders on rent, especially if you're only short term. Whilst short term may not be preferable for landlords, if it's part of a complex with others vacant, at least there is someone paying the outgoings for the landlord, even if for only a year. They can also use it a marketing tool to create urgency on the remaining units if you lease one.
     
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  9. blw101

    blw101 Member

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    Good advice in here, if you can only commit to 12mths wouldn't expect to get much leeway but depends on the owner's position.

    The main commercial negotiation points are typically:
    - headline rent
    - annual increase/escalations
    - lease term and options - noting any option benefits the tenant
    - incentive - agree Scott's idea is a good one to lock in option with incentive now.
    - treatment of outgoings - a gross lease with CPI escalations is a good outcome
    - security guarantee
    - makegood - you typically need to remove the fitout at your cost if/when you vacate

    Good luck.
    blw
     
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  10. Shady

    Shady Well-Known Member

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    Not sure what you mean here, use a broker for what?


    I suspect its similar in WA but in NSW a lease term of 3 year or less (including the option) is not required to be registered. In this case you may be able to save lease preparation fees by using a simple proforma lease prepared by the agent. If you don't feel comfortable with this then definitely negotiate each party to pay there own legal costs otherwise you'll probably be asked to pay the lessors reasonable costs associated with the preparation and registration of the lease...including any mortgagee consent fees.

    Negotiate a low bond. They may want 3 months or 6 months bond. Offer them 1 or 2 months.

    If its a new(ish) strata complex the try really really hard to negotiate a gross lease as mentioned above. Strata levies tend to significantly after the first few years either because maintenance issue start appearing fro the complex or more common, the developer set the strata levies really low in order to sell the units, a few years down the track once they're all sold the executive committee work out that the levies raised are not enough to run the strata plan.

    If a landlord accepts a 1x3year lease you know they're really motivated to get a tenant. Keep in mind a 1y x 3y lease will most probably need to be registered (it does in NSW) where a 1y x 2y lease may not need to be registered (it doesnt in NSW)

    refuse to offer directors guarantees (if you're a company anyway)

    I'll think of some more things but you've got a good start.
     
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  11. Ampers

    Ampers Active Member

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    Sorry i meant agent. We would like to approach this as low doc as possible. Happy to do a personal/bank guarantee. Although we have no assets so not sure if we make the cut in that regards.

    Could someone expand on what free rent and fitout actually means? For us the fit out would be very minimal since the place as it stands meets our needs. Apart from a bunch of desks and cupboards were pretty good.
     
  12. Scott No Mates

    Scott No Mates Well-Known Member

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    These are both incentives for you to lease a property and affect each party differently.

    Fitout incentive - say $10,000 + gst
    This is paid to you/your suppliers for works in the premises. These may be required to be paid back if you sell/vacate before the lease expires. It may be considered income so advice is required. If the incentive costs the owner $10,000, then they will also recoup this over the term of the lease eg as an extra cost of say $2200/yr over 5 year lease term.

    A rent free is a short term rent holiday. Rent stays the same and maintains the asset value for the owner. When the rent free expires your rent returns to the normal rate.
     
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  13. Ampers

    Ampers Active Member

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    Rent free periods - Are they usually averaged out over the full period of the lease like a built in discount? Or can you use this allotted time at say the very start of the lease? Commercial seems very open in terms of what you can offer/accept.

    Has an almost used car salesman vibe to it.
     
  14. Scott No Mates

    Scott No Mates Well-Known Member

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    Either or is the answer. You can negotiate x months rent free or x months at half rent or negotiate hard for a discounted rate. The latter hits the owner's asset value the most.
     
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  15. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    I've mostly seen it rent free at the beginning but the tenant still pays the outgoings during the time.
     
  16. Scott No Mates

    Scott No Mates Well-Known Member

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    I must be horrible, rent free happens at the end of each lease year not at the start. After suffering a vacancy, payment of commissions etc I get the rent rolling in asap. I treat it as an incentive - pay your rent on time, then on the 12th month the tenant gets their rent free period.
     
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  17. Ampers

    Ampers Active Member

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    Relative to resi setups, commercial is rather complex. Simplicity seems to be an after thought. Ive heard of much simpler agreements though its seems they are an exemption.
     
  18. thatbum

    thatbum Well-Known Member

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    Generally the commercial leasing space is where you're (mostly) free to contract in whatever way you want. I guess "complex" is one way to describe it, but you could also say its more flexible.
     
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  19. Shady

    Shady Well-Known Member

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    Not complex at all, I actually think its easier. Dont have to deal with silly residential tenancies act
     
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  20. Ampers

    Ampers Active Member

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    Speaking from a Lessee's POV. Lessor i can see how it would be simple.