Your Doorway to Commercial Property. FREE to List!

Reprinted from Parallel Directions. See original post HERE!

I’m predicting the commercial tenancy market is about to become a bloody battlefield as times get really tough for investors and landlords managing commercial property portfolios.

There are five key factors that will cause this warring between landlords.

1. High Vacancy Rates. On 3 November I reported that vacancy rates were over 15 percent and could go higher in 2010. At that stage the real estate industry was still in denial and reporting a rosier picture. But latest research shows vacancy levels, particularly for office space, running at highs not seen since the early 1990s. There is now acceptance that vacancy rates could hit 16 to 18 percent.
2. Increasing Supply. Add the new office space coming on stream over the next two years to the high vacancy rate and you have one almighty glut. Auckland has 75,000 square metres due to come on stream in the next two years, and Wellington has 90,000 square metres!
3. Legislation. The third factor that has landlords squirming is Government’s indication this year’s budget will do away with depreciation provisions for tax on rental property, plus the possibility of a land tax.
4. Low Demand. Demand is still dropping. Many businesses continue to shrink, very few new start-ups are underway, and more and more businesses are looking at ways to cut costs by using less space and having people work remotely.
5. Falling Rentals. Commercial rentals are falling by 15 to 20 percent in Category-A buildings. This is an indicator that rents are on the way down in all categories.

If we delve into what’s happening, we can see that new space coming on stream is all largely committed to new tenancies. But vacancy levels will soar as these tenants vacate older premises to move into the new buildings.

I predict the commercial lease market will turn in on itself and we will see landlords poaching each others tenants as they vie to keep their buildings occupied.

While this buyers’ market might seem to benefit commercial tenants, these are very dangerous times and you must act cautiously and with expert advice.

Landlords can easily sugarcoat deals to make them appear more appealing to tenants. And commercial real estate agents working on commission will continue to con tenants into believing there is a set price and terms & conditions for rental space.

It takes shrewd advocacy on behalf of tenants to ensure good deals are negotiated and achieved as landlords and commercial real estate agencies go into “convince at all costs” mode in a desperate attempt to keep buildings fully occupied.

If you are involved in the Commercial Property Sector then you may be interested in what Peter Hamlin has to say.

Peter produces a twice monthly Newsletter called Commercial Property New Zealand which is full of interesting articles on the commercial property sector.

The newsletter is subscription based and costs $240 plus GST for 24 issues.

You can contact Peter at [email protected]

Rapaki Property Group is pleased to announce a new leasing initiative for the six months from 15 January 2010 to 15 July 2010. For our buildings, we will pay TRIPLE COMMISSION for leases written over six years in duration and DOUBLE COMMISSION for leases of under six years.

Terms and conditions:

1. This offer is valid from 15 January 2010 to 15 July 2010.

2. To be eligible, an unconditional Agreement to Lease must be signed before 15 July 2010. There may be some reasonable exceptions to this, but they will need to be discussed and agreed at the time and on a case by case basis.

3. Lease duration is measured less any rent free periods or other incentives offered. Accordingly, a six year lease with a one year rent free period, Landlord’s fit-out or similar would only be considered a five year lease and eligible for double commission only. To qualify for triple commission it will need to be seven years. The value of any incentive is calculated against the value of the lease term at the quoted rate in the Rapaki Property Group list of vacant space as emailed on 15 January 2010.

4. Commission is calculated by reference to the standard scale of fees set by each Real Estate company on 15 January 2010 and will be paid as per the standard process.

5. As per usual, effective agency is the most important criteria in determining who receives the commission. We will however notify you if a tenant has been taken through our buildings with another agent or directly through us.

6. CHRISTCHURCH AGENTS. Golden House (728 Colombo Street), Union House (193 Cashel Street) and the Waltham Road collection of properties are excluded from this incentive.

We look forward to working with you in the months ahead.

SIMON HENRY – Managing Director

15 January 2010

Written by Michael Smyth on Business Blogs.  See original HERE

Why Business Tenants should proceed with caution

With commercial vacancies in New Zealand’s main commercial centres tipped to go above 10%, many businesses may be tempted to get bigger or better premises, or open up new offices to take advantage of lower rents. However, the future has never been more uncertain than in the current economic downturn and businesses are well advised to look carefully before signing any documents which could ultimately spell financial disaster later on.

Know your documents

Before signing any document, you must understand what you are signing. Do not rely on the word of a Real Estate agent who may tell you that “its standard and everyone signs”.

If you are going into business premises there are two types of documents which you could be asked to sign: a lease and an agreement to lease. A lease is a contract between you and your landlord which sets out all the terms you have agreed relating to how that lease will operate. An agreement to lease on the other hand, is simply an agreement that you will enter into a full lease agreement at a later date. Since it is not a full lease, the agreement to lease does not contain all the terms you will later be agreeing to. By signing an agreement to lease document you may be committing yourself to signing a lease which works against you and in favour of the landlord. Therefore, it is important to get any agreement to lease document checked by a lawyer before you sign. If you don’t, then it may make it extremely difficult for you to extract yourself from onerous lease terms later on.

What onerous terms should you look out for?

There are a number of clauses in a typical or standard lease agreement which you should watch out for and negotiate. The first issue you should consider in the length or term of the lease. Don’t be persuaded into entering a long term such as six years without the ability to get out of the lease early if you need to. In the current economic climate you need the flexibility to bail out in case business goes bad. If you have committed to a long term then you remain liable for the rent whether you are in occupancy or not.

If you set up a separate company to take the lease, you may not think that will avoid the risk but it is likely your landlord will ask for a Director’s or Shareholder’s guarantee. This makes you, the business owner, personally liable if the company doesn’t pay. The same could apply if you assign the lease to another business and it doesn’t pay.

An assignment may not solve your problems either

When you “assign” a lease, you sell it to another party so that they become the tenant for the remainder of the lease term. You would think that this would absolve you of a liability to pay rent, but not necessarily. Many lease agreements provide that the original tenant (and guarantor) remain liable for the rent regardless of any assignment to a third party. Therefore, if the third party defaults on the rent, the landlord may come after you. Clearly this is undesirable so you need to negotiate these clauses to absolve you of any liability. If you don’t, you will not only end up liable for the rent which you originally agreed but also any rent increases that occur during the term… which brings me to my next point.

Will any rent increases be fair?

Beware of what are commonly called “rent ratchet clauses”. These are clauses which automatically increase the rent at given review points regardless of what the market is doing. Such clauses could mean that you end up paying greater than market rent which is very undesirable. Rent reviews in themselves are normal but they should be based upon market rent and not on some arbitrary figure. Therefore, pay close scrutiny to how these clauses are drafted.

Of course, the obligation to pay rent will just be one of many tenant obligations contained in the lease and care should be given to ensure that the remaining obligations are also not too onerous. For example, the obligation to maintain the premises will fall upon the tenant but you must ensure that they are not too wide. Also make sure that you have budgeted for other costs such as rates, insurance premiums, rubbish collection etc. One cost which sometimes catches tenants out is the obligation to pay the landlord’s solicitors’ costs for preparing the lease. Make sure you find out what these costs are (and negotiate them down) before you proceed.

Always Proceed with caution

Needless to say, lease agreements require careful reading before you sign on the dotted line. Few business owners will be qualified to do this without expert advice which is where your solicitor should come in. Always run these documents past your lawyer first and never rely on the advice of a real estate agent, otherwise your business could end up with a weight around its neck which in turn could spell financial disaster for you and your business.

The following is a recent blog from Parallel Directions.

The commercial rental property market in New Zealand continues to be very much a tenant’s market… but there are many landlords who simply don’t get it.

Negotiating myopia
It amazes me in the many negotiations I conduct for clients how many landlords take such a short-term view and, by playing hard ball, lose out on securing long-term tenants.

In today’s over-supplied market it is more important than ever, one would think, for a landlord to build a good and long-term relationship with tenants. But alas, many still don’t get it.

In my experience, the good majority of commercial property landlords in New Zealand have very poor negotiating skills. They are often inflexible and take a narrow view regarding their income and profitability.

Here is some free advice:

• Do not bow to the assumed power and might of the landlord.
• Consider the range of possibilities in negotiation.
• Offer alternatives that can secure a deal that suits the tenant.
• Make sure those alternatives also meet the needs of the landlord.

75% of these landlords didn’t get it…
Of the four most recent commercial property negotiations I’ve been involved in recently, only one landlord was flexible, prepared to build a relationship with their tenant, and look to the long term.

Prediction:
I predict that come the next rent review, this relationship will last and a rent renewal to benefit both tenant and landlord will be achieved. In the other three cases where the landlord has been inflexible, the tenants will leave to find a better deal.

I believe it is the way of the future that win-win solutions in business will result from thinking about the needs of the other party.

Advantage
The advantage I have negotiating strategies on behalf of tenants is that I can take a totally independent view and offer up win-win proposals that not only benefit my commercial tenant clients, but educate landlords about potential alternative deals and how to win secure long-term tenancies.

I’m lucky that I am not responsible to any corporate entity that demands I negotiate in a narrowly focussed manner. That enables me and my clients to make the best of today’s buyer’s market… and potentially up-skill a few landlords in negotiating mutually beneficial deals at the same time!

What about you?
Have you had success negotiating a lease with a reasonable landlord or has your landlord been inflexible and hard nosed? How has this influenced your attitude towards your landlord and your intentions to stay or go? Leave a comment below and share your experiences with other readers…