How Lease Incentives Can Attract Tenants in Commercial Property ...

An investment property without a tenant is like a boat without a rudder. Landlords in commercial and retail property need tenants to give their property a pattern of performance and growth. In any property market, good or bad, you as the real estate agent can find a tenant; it just takes lease creativity and great prospecting skills.

The relationship between the tenant and landlord should be consolidated through a well-designed lease. Make sure that the landlord has excellent legal advice to put in place a well-structured lease.

When the market gets tough, the vacancy factors rise and businesses seek lower rent or other lease incentives to move to fresh and new premises. This is where lease incentives are of considerable use and part of a property performance or leasing strategy. Watch for fluctuations in local supply and demand for leased premises.

Landlords are well advised to accept and strategize their lease incentives. This is where real estate agents can advise landlords of just what incentives can work in the local property market.

The most common lease incentives to use for commercial real estate are:

• Reduced rent from lease commencement to a set date during the lease
• Rent free period for a period of time in the lease of the premises
• Landlord provided fitout in the premises
• Landlord provided cash for the tenant to apply to fitout or move of premises
• Landlord funded payout of a tenants previous lease obligations

A lease incentive can actually be anything of value to the tenant, providing they are prepared to give the landlord a solid and well-structured lease in exchange for occupancy of the premises.

Lease incentives should reduce over time as the property market will not be the same in 12 months or 24 months. Things change, so the impact of the incentive on the landlord should be lessened as the lease term continues. In an ideal world the lease incentive should be used by the tenant in the first year of the lease so any future property sale will not be impacted by incentive payments.

Short leases of 1 to 2 years should have little if any incentive offered by the landlord in the lease. Leases of 3 years will likely be considered for a small lease incentive, and leases of 4 plus years will likely have a lease incentive to entice the right tenant to the property.

The option to extend the lease of a tenant into a further term would not normally create the need for a lease incentive as the tenant is already in occupancy and has a factor of inconvenience and cost if they decide to move.

The level of incentive to be provided to a tenant really does depend on the market of the time, the supply and demand of available space, and the local and regional business sentiment.

Incentives in the leasing of property are not free. The theory is that any incentive the landlord provides to the tenant should be mortised back into the lease cash flow over the initial lease term (not the option). In this way the landlord gets back their money from the initial outlay on the incentive.

If a landlord intends to give a lease incentive of any type to entice a tenant to occupy vacant premises then it is prudent for all other lease commitments to be satisfied before the incentive is given and the premises are handed over. Other lease commitments to be satisfied could be:

1. A signed lease in correct legal form
2. A satisfactory level of bank guarantee or bond to offset any tenant default in the future
3. Personal guarantees by the tenant for the performance of the lease
4. The payment of the first month's rent
5. A full set of tenant fitout plans and requirements for landlord approval

Lease incentives come and go as a strategy in property leasing. Importantly the landlord is prepared for the matter and the real estate agent can advise the landlord of the best incentives to use in the local property market at the time.

Watch for other property agents and landlords seeking to take your tenants to other nearby property. They will also be using incentives to attract your tenant to their buildings.

Source: http://www.slowfoodcup.org/49-how-lease-incentives-can-attract-tenants-in-commercial-property.html

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