WEBINAR – An Introduction to Commercial Property Management for Investors

Welcome to the webinar on ‘An Introduction to Commercial Property Management for Investors’

This webinar is a focus on commercial property management, which includes a brief overview of the differences between residential and commercial properties and some important aspects of commercial property management that every discerning investor should be aware of.

Commercial Property

What is a commercial property?

A property used for business activities such as retail, office, warehouse and industrial warehouses, educational and medical facilities.  In some instances may also include larger buildings used for accommodation such as apartment buildings (air bnb, serviced apartments), hotels and even mixed use buildings where property includes retail, office and apartments. In other words any entity that incurs GST.

Commercial Real Estate (CRE) is a different type of risk but also high reward asset class.  Often commercial investment properties will require a larger deposit and mortgage rates will be higher than residential rates.  In general CRE can attract higher returns with slightly higher risks and deposit and lending requirements will be different from residential

Compared to residential tenancies, commercial tenancies are more structured, can have longer term tenures and rent arrear scenarios differ to residential, e.g. 1 months default may be $2,000 in residential but $20,000 in commercial.

Common Commercial Terms

Making good: return property to original state

Right of first refusal: landlord is required to offer additional space to current tenant before offering it to the general public.

Rentable Square Meterage: amount of space inside the office or building being rented, the space the tenant is actually occupying within the facility.

Shared common area: a portion of the total square meterage shared with other tenants such as bathrooms located in hallways, reception areas, on site gyms, elevators and cafeterias.

Deed of Lease

What is a deed of lease?

Is the document that determines and governs the relationship between the property owner and tenants; and will determine terms and conditions for the tenant e.g. rent, length of lease, OPEX contributions, also includes rent review timing and end of lease obligations. A Deed of Lease is written in accordance with the property law act, and this document is a template provided by the Auckland District Law Society and used industry wide.

What is the difference between an agreement to lease and a deed of lease?

• Agreement to lease sets out the broad commercial terms e.g. the right of renewal, rent reviews, etc. This is often like a proposal of what the tenant would like, that a landlord could agree to.
• The deed of lease incorporates the commercial terms from the agreement to lease and also provides detail about the day to day operations of the lease. g. what are the obligations to maintain the premises, what is required to alter the premises or what happens at the end of the lease?

Rent Reviews

Rent review Clauses

A rent review clause in the deed of lease provides the parties the ability to increase their premises’ rent to reflect that property’s current market value. The objective of rent review clauses is to balance the rent with changes in the value of money and property market throughout a lease.

Rent review clauses are not compulsory for commercial leases in NZ, and if included in the lease may be compulsory or optional.  Optional means that the owner may discharge the review at their discretion.  Each lease may vary highlighting the importance of familiarising yourself with clauses in your deed of lease.

Most common methods of rent review are:

• Market rent review compares the price of rent for the premises with the current market rates for properties of a similar standard, size, location and usage at the time of the rent review. Usually requires a professional and independent valuation of the property. Ratchet clause may be included in a lease which dictates that rent can only increase and may never decrease despite the property markets’ movements.
• Consumer Price Index (CPI) is the measure of inflation published quarterly by Statistics NZ. When reviewed rent will either increase or decrease per the rate of inflation.
• Fixed percentage increase rent review is where rent is increased at specific percentages specified in the lease on specified review dates. E.g. rent will increase by 5% every 6 months

OPEX

What is OpEx?

OpEx stands for Operating Expenses (based on sqm if more than one tenant in the building, i.e. shopping centre). Water and power meters should be separate to ensure easy reading and fair charges to each tenant for consumption

Building expenses split proportionately between tenants and may include council rates, insurance, lift maintenance, common area cleaning, grounds maintenance, fire system and alarm monitoring.

Tenants pay OpEx with rent to the Property Manager / Owner who then pays out the operating expenses directly to relevant suppliers / contractors – this is best practice.

Buying a house is CapEx, renting a house is OpEx.

Buying a car is CapEx, using a taxi or Uber is OpEx.

BWOF

What is BWOF?

BWOF stands for Building Warrant of Fitness and is legally required under the Building Act and is monitored by local government.

BWOF ensures all mechanical essential facilities maintained to specific standards e.g. automatic doors, fire signs, extraction units, heating / cooling systems, escalator, lift, sprinkler systems, etc.

This certificate needs to be on display in buildings.

The Role of a Commercial Property Manager

What does a commercial property manager do?

• Conflict management and communication between owner and tenants
• Collect rents from tenants, arrears policy
• Regular property inspections – preventative maintenance checks
• Hire contractors to service property – economies of scale
• Lease management – we aim for 100% occupancy
• BWOF and H&S compliance
• Financial administration – trust account independently audited
• OPEX reconciliations and recovery
• Budget planning and annual wash-ups

Responsibilities

Owner vs Tenant obligations

When it comes to the management of a commercial property, who is responsible for what?

This is the area where most conflict may happen between owners and tenants, making it very important to ensure the deed of lease is thorough in listing each entities responsibilities and obligations.

Owner

• Insurance and building maintenance
• Tenant retention starts with communication, preventative maintenance checks, replacing minor item each year in order to keep a fresh appearance

Tenant:

• Ensure OpEx obligations are met as laid out in the deed of lease
• Importantly keeps up to date with BWOF annual checks and certification, and performs regular health and safety audits

Q & A with James Bangerter, Commercial Property Manager at Auckland Property Management

Toni asked James the below questions regarding commercial properties and their management. Click on the video above to listen to the full interview and more detailed answers (from 13:00)

What would you say is the biggest difference between residential and commercial property management?

• Compared to residential properties, commercial properties are more structured and can have longer term tenures and lower rent arrears.
• The RTA dictates lease terms and conditions with very little flexibility, however the deed of lease can be amended quite extensively as long as each party is in agreement
• In a residential property tenants are not allowed to make any significant changes to the property, whereas a commercial tenant does a full fit out according to their business’ needs and requirements
• Also the daily tasks and documentation used / required differs between residential and commercial properties

Where do you see most deeds of lease fall over?

• There needs to be clarity around maintenance – when it needs to be done, by whom and health & safety compliance by contractors.
• Any changes to the deed of lease should be approved by a solicitor to ensure no ambiguity or misunderstanding occurs.
• We see that most deeds of lease need more definition around debt collection – who pays for what?

What are the most common areas that DIY commercial property owners have issue with?

• Lease renewals and rent reviews – no follow through
• Not going beyond agreement to lease and creating deed of lease
• Multiple tenants – management of shared OpEx, not doing proper budgets / annual wash-ups
• Not getting tenants to pay for items for which they are responsible for paying e.g. vandalism – graffiti removal

How can we assist owners with vacant commercial properties?

• Because most letting agents specialise in types of commercial properties, e.g. industrial, retail or office – we have formed professional relationships with industry leaders in the commercial leasing sector and outsource vacant listings to these when required
• Leasing agents are similar to real estate agents – mostly commercial sales agents do lasing as well, commercial leasing agents are more area based and some specialise in type of property e.g. office, retail, industrial

There has recently been a change in notice periods for arrears, how does this affect owners?

• Changed from 10 days notice to 30 days notice following the outbreak of the global Covid pandemic.
• This is the government allowing people more time to remedy breaches.
• Avoids potentially costly legal fees – note solicitor’s’ PLA notice holds more strength.

Who pays our management fee?

• Management fees often form part of OpEx and is usually covered by tenants (most common).
• Our management services and fees are 100% tailored to each client’s needs ensuring an agility that aims to accelerate your success and minimise risks.  Landlord can pay fees until tenant is replaced

What are the most common problems that you face with tenant management?

• Multiple tenants – shared costs / common area maintenance / renewal and reviews
• Who pays for what? Budgeting, OpEx recovery

How can we assist with Compliance?

• Compliance areas that need attention: BWOF, fire systems and Health & Safety – these require regular audits – tenant is responsible for cost but landlord / property manager needs to ensure that these are completed regularly.
• BWOF, there are contractors that specialise in each area, property managers can co-ordinate.
• Health and Safety – hazard identification and notify incoming people.
• Health and Safety Specialist Company identifies hazard and produces report – landlord implements but tenant covers the cost (each tenancy will differ in H&S requirements).
• High risk property annual audit, low risk / new tenant 2-5 year audit

What happens when the lease terminates?

• An example of a good lease is a 30 year long term lease with 5 year right of renewals (notice period for termination or assignment of tenancy if tenant no longer wishes to lease property)
• Right of renewal is when tenants can terminate the lease or do an assignment – this should be through mutual agreement e.g. global pandemics such as Covid and property manager can assist