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Commercial Property Vacancies

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Transcript

Commercial Property Vacancies

So when thinking about commercial property, it’s very easy to think, “Okay, there’s so many risks involved the long vacancies, and all these headaches that can come with it. Now whilst vacancies are longer, that is not a myth, that is true.

I just want to share a few things about commercial property that can really help you understand and how to actually, take away these risks from the deal upfront. So firstly one thing people don’t know is in commercial lease agreements, when you review the end of lease term notification this is basically a time where once a tenant say if you’ve got a “three by three”, three year lease option for a three-year period.

Now before that first three year lease finishes commercial tenants on the lease agreement will note down how much time do they have to give you in terms of notice before they actually tell you that they’re going to take up that option or not. So for example, we’re currently looking at a commercial property with his four months of notice period. So If you imagine that it’s basically the tenant going “cool mate my lease is about to finish and four months before it finishes I can let you know whether I’m going to take up this option or not”.

Now if they say they are not going to take up this option sure commercial vacancies are longer, but now you’ve got four months to actually look at finding a tenant – listing it, advertising it and quite often that means that even if you had one months of real vacancy, it was five months in total but only one month cost you. This is a five month long commercial vacancy. But most cases you might be able to cover it off in that four months. So that actually helps you then go “Well, you know, I had a vacancy but then I just went from one tenant to the other”. So that’s something to consider when looking at these periods where you can actually look at the absolute end date and notice period.

The other things to consider to help you with the vacancy is that what if someone does a runner just jumps out of the lease? And how do you cover that? Sometimes there are things called Directors Guarantees and sometimes they think all Bank Guarantees. Now with this Bank guarantees, you’ll have cash coverage and you’re able to cover any one month’s rent, two months rent, or three months depending on the guarantee set aside. The other times are actually what you call a director’s guarantee, but it’s a bit more complex and something you should review the lawyer

Now with the directors guarantee, you can put yourself in a position with the personal director is held liable for the whole remaining coverage of that lease. That actually could be a lot more money to cover if they lift quite early on in their lease rather than a one or two month Bank guarantee, but in saying that what are the personal director has nothing against their names or there’s a long court or long process to take them through that journey of trying to get that money back. So just something to understand as well, but when it comes to commercial property vacancies, obviously, it can be heightened by the asset type you choose as well.

Now if there is an in-demand asset where vacancy rates are quite tight or the tenant demand is high or the industry is performing well and if this just may be harder to replicate or it’s quite scarce in terms of Supply, then those types of assets – Yes, you’re going to have less vacancy, but on the other front replicable assets assets that don’t have a bit of a twist assets that are in low demand, assets that are having, industry-wide issues or supply issues or or industry-wide in economic problems, then all of a sudden it might be a bit harder to have that tenant one to inject money come in there set up shop, setup a place and call it business their home.

So I think that’s something to consider as well aside from the industry target, lease agreement due diligence and the lease agreement security that you have held in there. All of these can help you actually anticipate cover and risk manage your vacancies up front because that’s what it is really there is vacancies in there is risk involved but those risk actually alleviated by knowledge and that knowledge of understanding where to go. So hopefully that helps you on your journey of commercial property acquisition and looking at that space.

That’s it from us here at InvestorKit, the Experts in wealth creation, helping you take action.