Wednesday, May 26, 2010

Strengthen your future net income when leasing

When vacancy rates are high many landlords fall into the trap of reducing the lease rate for the entire leasing term. Even with built-in increases it can drastically reduces your net income in and impact a future sale. Here are some strategies that might help.

 1. Instead of reducing the initial rate try giving free months up front and/or stair step the rate over the 1st year. Then when the economy turns around and rates are back up you will not sitting behind the curve. And you are in a better position for a sale when the lender looks at the investment’s net income.
 2. If tenant improvements are negotiated tell them up front that the costs will be built back into the lease rate over the leasing term. If the costs raise the rate beyond their budget it gives you an opportunity to lock them into a longer term. Or get them to finance the costs by offering free rent up front. Many times when they make the investment the lease term is increased.

3. Many landlords do not factor in Common Area Maintenance (CAM) charges. The costs can devour your net income. Take a look at the previous years costs, add them up and divide them over the square footage to give a $/sf CAM charge. CAM charges vary from year to year and if you have high snow removal costs one year your bottom line stays intact because the tenant absorbs those costs. 
Even in down times a few simple strategies can turn a modest return into a strong investment if you strengthen the future net income!