In commercial holdings, landlords generally only have the ability to renegotiate rent every three to five years, so when the time comes, it’s important that they do their due diligence.
According to Adam Grbcic, a commercial sales consultant with Kollosche, the rental income from a property has a direct correlation to its overall value during the lease period, which is why he believes “it’s vital to get this right”.
“Most commercial leases are structured with an initial term and an option period. When the lease comes up for renewal, the tenant has a three to six month notice period in which to inform the landlord of their intention to take up the lease option,” he explained.
If the tenant decides to renew, it’s then up to the landlord (with the help of their property manager, if they employ one) to present the tenant with a rental proposal for the next lease term. To ensure this proposal is fair, and that the investment is performing well, a landlord should gather supporting evidence.
“When completing a rental assessment for a specialised tenant, we advise obtaining evidence of a lookalike tenant as well as the location assessment. While you won’t always have access to like-for-like tenants within the same suburb, a broader search may be needed to gain this,” Mr Grbcic advised.
And he noted that while nearby properties can provide valuable information, it’s important to cast a wide gaze.
“Be careful not to pigeonhole yourself into comparable rental evidence within the same suburb because different tenant types have different capacity to achieve certain rent,” he said.
Of course, it’s common to have to negotiate with a tenant on rental increases. If a tenant doesn’t agree with the proposed rent, there are still avenues to allow all parties to come to a compromise. Mr Grbcic said that while many landlords want to avoid engaging the services of a valuer to provide an independent appraisal, it’s a step that should be embraced.
“Valuers have access to a database of leasing evidence and relationships with other agents, property managers and industry sources to obtain relevant rental evidence. It does come at a cost, but that cost is split between the landlord and the tenant,” he said.
The valuer will determine the market rent, and the tenant can then either accept, dispute or terminate their lease.
Mr Grbcic urged landlords to remember that negotiating a lease is a balance between protecting the property value while also endeavouring to keep the property tenanted.
“The cost of losing your tenant will likely outweigh any gains in rent,” he acknowledged.
Like in any negotiation, good communication is key. Landlords or property managers should see if there’s a way to incentivise the tenant without comprising the value of the asset.
“Ask the tenant what you can do to help them reach the market rental rate, now or over time. This could include capital works that you can do to the building or an incentive structure whereby a rental increase is staggered over the term of the lease,” Mr Grbcic advised.
Never miss a beat with
Stay across what’s happening in the Australian commercial property market by signing up to receive industry-specific news and policy alerts, agency updates, and insights from reb.
Subscribe to reb Commercial: