What Tenants Do You Want?

As a property owner and investor, you will sometimes be actively seeking a new tenant to fill a vacancy in your property.  The best way to market the vacancy is through the dedicated efforts of an experienced real estate agent that is working for you on an exclusive agency basis for a period of 3 or 4 months; that is generally how long it takes to tap into the target market for the property and find the right tenant. 

The exclusive agency method gets the agents full focused efforts during the time that the listing is promoted.  If the property has not leased by the end of that time then something is frustrating the leasing process (such as high rents, poor quality premises, abundance of lettable space available or poor location)

Let’s say your marketing of the property has just commenced.  The adverts are on the internet and you have a signboard on the property.  Enquiry is good and inspections are occurring.   So along comes a new tenant; and then another and yet another.  All of a sudden you have 3 tenants all looking at the premises and soon the offers come in.  So the question is just who do you choose as your tenant to take the premises and why?

The issues involved in leasing decisions are complex and involve many long term issues.  The reality is that the best tenant is not always the one that is paying the highest rent; it is the one that is producing the best cash flow over the lease term (plus other things).  To analyse that fact you can do a net present value (NPV) analysis of the passing income from the lease taking into account the key factors from the lease over its duration such as:

  • Start rent
  • Lease term
  • Rent review methods and timing
  • Value of incentive provided
  • Cost of money (%) over the term

That will give you a better reason to select one tenant over another.  Interestingly the tenant with the highest NPV will not always be the one with the highest start rent.  It is the long term package and rent review structure that matters and you will see that in the NPV number calculated.