When you take over the management of a commercial or retail property today, the information that you gather from the outgoing property manager or landlord will be critical to the establishment and future success of your property management processes.
Information is Critical
Lack of information in the handover process means problems and potential errors in the future. On that basis you should have a specialised handover process that you can implement on and with the handover of every property type within your local area. A checklist will help your activities as you bring in the new property to the management portfolio.
Here are some ideas to incorporate into your handover checklist:
- Get complete and comprehensive details of all leases and licensed occupied areas within the property. You will need to check these against the tenants physically in occupancy and the rental invoices that are raised for tenancy payment. Everything has to cross relate accurately.
- Copies of lease documents should be checked against the original documentation. Also look for side agreements for any extension or variance documentation relating to the original lease.
- Copies of correspondence relating to existing tenancy matters should be handed to you. Ask for this specifically and drill down on the details of each matter.
- Get copies of the current rental invoices and cross reference these to the tenancy schedules for the property. It is not unusual to come across in errors in the tenancy schedule or the rental invoices.
- The tenancy schedule should be checked against the actual leases and other occupancy papers and the signed documentation between the landlord and tenant.
- Check all outgoings charges and expenses that are applied to the tenancies within the managed property. The charging process should be shown on the rental invoices; you will need to check this amount and the process of recover that is adopted. It is not unusual to see errors in the outgoings recovery with tenants in managed properties. The process of checking will involve you getting copies of the current outgoings budget and the recent outgoings reconciliation.
- The arrears that apply to the property and any tenancies should be identified as part of the handover. They are sometimes discharged at the time of settlement, although the question should be raised in case you are taking over the ongoing pursuit of the arrears with any existing tenants. If that is the case you will need copies of all previous correspondence and claims.
- Current vacant tenancies within the premises may be the subject of lease negotiation. You will need copies of the lease offers that are or have been made and the status of the existing negotiations.
- Details of the maintenance issues within the building will be required. The essential services within the building will be critical maintenance contracts to identify early in the Handover. Any threats to the stability and function of essential services should be identified and addressed immediately. The maintenance contractors for the building will understand the function of the existing plant and machinery; get details of these contractors and then set up meetings as quickly as possible.
- Ask about any orders or notices that apply to the property or any part thereof. Check out any encumbrances, rights of way, or easements that apply to property usage.
So these are some of the main items that apply to the property management handover process. There will always be more issues and items to look at although these items listed above are the big ones to immediately get under control.
In commercial real estate agency, it is common to be preparing a property management proposal to submit to the property owner following a sale or a lease. This is the most opportune time to seek a new management appointment.
The structure of a commercial property management proposal will be designed for the property, the landlord, and the general precinct location. Importantly the proposal should tap into the strategies and ideas that help the property owner to achieve better property performance through sensible strategies of lease performance, income, and expenditure control.
Here are some key ideas to help structure your proposal for the management of the property. You can add your specific agency recommendations around the model.
- An executive summary should always be placed at the front of the document. This allows the client to quickly grasp of the main strategies and outcomes that you can see as part of the management strategy.
- Summarise the property physically together with locational elements that impact tenancy mix or occupancy. This provides clarity as to how you see the property and how it can be managed.
- The lease and tenant mix management processes should be detailed within a section of the proposal. Care must also be taken in reviewing the tenancy schedule first to ensure that the leases are totally understood and accurately reflected in your recommendations. You should also be looking for occupancy matters that need to be immediately addressed after management handover; such as rent reviews, options, lease expiries, make good processes, and arrears.
- The daily maintenance and function of the property will require a specific management processes. The tenants, customers, and landlord each have a different relationship to the performance of the property physically; they all have needs in the management of the property. It is wise to review the special maintenance demands of the property and to make specific recommendations regards maintenance controls, plant and machinery management, and risk management that applies to property function. As part of this it may be necessary to talk to the contractors that supply specialised maintenance services to the plant and equipment.
- The property manager reporting processes to the landlord will be part of the property management service. Detail the relevant reporting systems that you can adopt and implement. The landlord may have other particular special reporting requirements to incorporate into the program.
- The financial reports to be provided to the landlord can be split into examples at the back of the document; this allows the landlord to see the comprehensive nature of your reports and controls. Normally the reports will include income analysis, expenditure analysis, budget status report, arrears report, tenancy mix strategy, tenancy schedule, and lease management report.
- The management of maintenance contractors associated with the essential services and major plant and equipment should be itemised. The major plant and equipment provides functionality to the property and tenant occupancy comfort. Any concerns that you may have here should be identified in the proposal.
- If the subject property is complex and contains a number of tenancies, it is likely that a business plan including a tenant mix strategy should be compiled. This helps the landlord to see just how you will implement controls across the tenant mix.
- Summarise the relevant personnel to be applied to the management of the property. In a large office or retail property the list is lengthy; it can include property manager, lease manager, engineer or maintenance manager, tenant services manager, and onsite management staff.
- The fees to be charged to manage the property should be itemised. In some cases they will be split into base management fee, on site management office costs, and the on-site management staff.
Within each of these main categories of your proposal, you will have recommendations and ideas regard particular things that should be immediately implemented in the property.
The property management proposal is prepared on the basis of relevance to the property and the needs of the landlord; not on the relevance of your agency to manage it (you will prove that anyway if your proposal is of high quality).
When you manage commercial real estate, the outgoings within the property will require focus and financial control. When the property market slows or gets tougher, managing the outgoings is really important; the outgoings form part of the financial strategy for the landlord and will impact the net income for the property. If the outgoings get too high, the property will be hard to lease and hard to sell.
Set Some Rules
You can split the outgoings into a number of categories and this is normally done to identify and track the cash flow by expense streams. Most importantly there are two sides to the outgoings equation. Some of the items will be controllable and others will be uncontrollable. This means that the landlord can exercise control on only some of the outgoings.
The uncontrollable outgoings are those which are imposed on the property and have to be paid without any opportunity for cost savings, adjustments, or budgeting. Those uncontrollable items are normally council rates, land tax, and water rates. To a degree, insurance and energy costs will also fall into that category although some cost controls are possible with these items.
To manage the property outgoings effectively it pays to adopt a process similar to the following:
- Create a budget for the property prior to the commencement of financial year
- Track your expenditure to budget monthly. Adjust expenditure when you see a need and reason; early adjustment prevents bigger blowouts.
- Look at the history of the property expenditure over the last few years to identify any excessive spending or items that are beyond the averages in the local area. The history of the property will allow you to adjust your budgets and cash flow expectations.
- Make sure that you have removed the capital expense items from the normal repairs and maintenance for the property.
- Talk to the owners of comparable properties in the same area. The outgoings between your property and their property should be similar. If not, you need to know why and take steps to fix that. Share information of outgoings costs with other similar property owners for this very reason.
- Monitor the annual valuations for rating purposes. When these valuations are done, you will soon see the statutory charges and council rates rise soon after. It is not unusual for landlords and property managers to dispute the valuation in an effort to keep the statutory charges at a lower rate.
In preparing an expenditure budget for the property, you should time the expenditure so that the larger costs are expected; hence ensuring that the cash flow is suitably adjusted in preparation.
The controllable outgoings are those that the landlord can exercise decision and timing. Normal items of repairs and maintenance together with the contractor maintenance will fall within this category. If the landlord chooses to delay the expenditure with the controllable outgoings, then they can spread the impact of those items on the net monthly income from the property.
In summary, the property manager working on behalf of the landlord should exercise due care and diligence in the budgetary process for property expenditure. A well-managed landlord cash flow in an investment property is a correct balance of income against expenditure given the tenancy mix pressures on the building and the existing vacancy factors.
The tenancy schedule is the tool of choice for a property manager or leasing manager in a commercial or retail property investment. It is the tenancy schedule that will keep the property manager up to task on forthcoming events and dates.
Often you find that the tenancy schedule is not up to date, so if anyone gives you such a document, treat it with the caution it deserves, and check it out completely before you act on the information contained therein.
So let’s say that you have a great tenancy schedule that you know is totally accurate. I get many questions about what I would want to see in a tenancy schedule. Here are my main priorities:
- Details of the tenant name, lease, and full contact detail for emergencies
- Tenancy identifier or suite reference that comes from the plan for the property
- The area of the tenancy in m2 or ft2 (depending on your unit of measurement)
- The % of the tenant area to the building net lettable area
- The rent $’s per annum, per month, and per unit of measurement (m2 or ft2)
- Lease start date
- Rent start date
- Lease end date
- Term of lease
- Option term of lease
- Anniversary dates and reminders for rent reviews, options, expires, renewals, renovations, and make good obligations
- Outgoings charges for each tenant on the basis of area and monthly charge
- Outgoings budget for the building
- Total outgoings recoveries for the property on a currency and % basis
- Types of outgoings to be charged to the tenants
- Insurance obligations of the tenant
- Rental guarantee details or bonds held
- Provision for critical dates relating to any important lease term or condition
- Maintenance obligation details of the tenants
This list is not finite and you can add your own extra priorities, I would however make sure that it is totally correct and maintain it to the highest level of accuracy. When you do this you can stay on top of important upcoming events that will impact the occupancy or rental of the property.
Whilst you can buy ‘off the shelf’ software programs that display this above information, that can be quite expensive for those commercial and retail property managers that are first entering this type of property. The alternative is to create some simple spread sheet that contains the data; in saying that, it is essential that great care is taken to maintain the spread sheet that you create. Any errors in the tenancy schedule can destroy your landlord, your business, your tenant, your reputation, and the property. Accuracy is paramount.