Commercial Property Lease Agreements

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Now in a previous episode of the board, I’ve actually gone through commercial property lease agreements. But what I want to do is actually just focus on in a particular part and this is renewing your lease.

Now when you’re renewing your lease, they’re actually can be different renewal progress has or periods. When you think of the actual rent movements, you’ve got annual percentage increases, you’ve got CPI increases that are actually a result of that Consumer Price Index inflation impact and lastly you’ve actually got market rent.

Now what can happen is that there’s been many leases that we’ve seen out there that have consumer price index for the first portion of it. But then when it comes to options Market rents come into play Now what can be dangers of those is if you haven’t analyzed the rents at the time of buying of the asset, if you start having increased rents go up then you come back to the option and you get a market rent review, What if the market rent review It actually catch up with where your initial increases are going. You’ll get a sudden shock of five ten fifteen percent in rental changes just like that and we’ve seen that many times over and some assets that we feel “Okay, It’s a great yield. It looks really well and maybe the first three years will come across really good”. But when it comes down to that option review at Market rent, we’re likely to see a decline in the rental yield and the rental dollar coming into your play.

It can also lead to tenant and landlord disputes because you think you’re being ripped off but really you just bought an overly inflated rental asset at the beginning and didn’t take those calculations at the end. So when you’re paying attention to buying commercial property really start to look at what type of increases are built in the CPI increases always the most stable because they’re real and they’re in line with that inflationary impact but percentage increases can be a little bit unstable sometimes but the most favorable in terms of the landlord getting more income, Market rents can be okay on the upswing but on the one swing can be pretty impactful unless going into it where it sits.

So for example, if you had a seven percent net yield asset and then in today’s numbers you’re looking at it and when you’re looking at it you go ”Okay. Well, okay 7% It’s got great percentage built-in increases” and in these percentage built-in increases start to happen and maybe in the third year It gets to a market rent for the next option. Now when that market rent comes up, you might look at it the percentage increases and go ”Okay. Well, yes, it’s been a bit of a jump. My worst case is that based on where rent levels are at from comparable assets. It might drop down to the original rent that I purchased it at now. I feel 7% 7.2 7.3 net you’re not going to feel so bad. You just going to know “I’ve got a couple of years of up and it’s come back down to its original but it didn’t drop way below substantially”. I didn’t buy an asset that was seven percent net when everything around me is five percent net. So these are the things to think of – Market rent, CPI, Percentage building increases and doing those comparables so when you’re considering the deep dive and commercial property really do consider those because you don’t want this thought of a very good return for the first couple of years you overpay on the asset and you have a higher expectation and then all of a sudden it comes to option renewals and you feel like you just been stabbed in the chest.

So consider that beforehand these Lease Agreements are crucial and the rent changes are crucial too and that should help you with your commercial lease agreement reviews.

That’s it from us here at InvestorKit, the experts in Wealth Creation, helping you take action.