leasing in property management

Understanding Leasing in Property Management

Property managers expected to know how leasing contributes to a property’s success or failure
Tuesday, September 20, 2016
By Peter D Willmott

Ever since the capital market crash in 2008, fund managers, asset managers, property managers and owners have been working to restore their property values and increase cash flow. While they can’t control cap rate fluctuations, they can control, through a solid leasing program, the property income.

Fund managers and asset managers expect their property managers to have a good understanding of the financial side of the business and how the leasing process contributes to the success or failure of a property.

To give property managers a solid understanding of this process and the impact it has on the valuation of a property, BOMI’s Real Estate Investment & Finance course and its Leasing & Marketing for Property Managers course thoroughly examine the financial side of real estate.

Leasing program elements

Since leases are generally five to ten years, when there is a market turn, markets are slow to react. Students in these courses quickly appreciate that since a building space is the primary source of income, it is paramount to understand how to maximize rental rates. Students of the Leasing & Marketing for Property Managers course learn about the key elements of a solid leasing program, such as:

  • Developing an approved budget that meets owner’s goals and objectives but also meets the financing requirements for the property.
  • Creating a solid “expert” leasing team which includes an experienced leasing manager, real estate orientated attorney and reputable leasing agents.
  • Establishing sound financial tools that can quickly calculate the negotiated deal’s “NER” (Net Effective Rental rate) and be adaptable to account for proposed changes in the deal’s terms.
  • Presenting lease-ready space which shows the building in the best possible light.

As the success of the property is tied directly to the success of the lease program, there is a lot of pressure to perform, both from the owners and potentially from the finance company to meet or exceed budget projections. Prior to the launch of a leasing program, all parties need to agree upon the budget. BOMI students learn the roles and responsibilities of the various parties involved in the leasing process, enabling them to properly navigate through various stages of negotiations to achieve a positive outcome.

Preparing a budget

Upon the launch of a leasing program, there are several key points that need to be considered and decided when preparing a budget.

In the Real Estate Investment & Finance course, students examine income and how it affects the value of a property and its ability to sustain itself. They also learn how the Net Operating Income (NOI) is used in valuing a property through capitalization.

Through examples, the course demonstrates that by increasing or decreasing the NOI, you can change the value of the property, which has a direct impact on property pricing and financing.

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Predicting future opportunities

While a program may require adjustments during lease negotiations, major decisions impacting leases should be made well in advance and not in the heat of a negotiation. With this in mind, BOMI’s courses address lease rates, which should be market-driven and derived from the specifics of your market and your four to five comparables.

Concessions, which can have either a financial or opportunity cost are also addressed. Conservatively estimating these costs, in either case, can determine if they fit within budget guidelines. The financial concessions which impact the landlord asset value include above market tenant improvement allowances, free rent, tenant improvement and other lease incentives, all of which can then negatively affect the building’s profitability. Students gain a greater understanding of how to keep these costs in line with their budgets by calculating the NER on all their deals.

The non-financial concessions, such as expansion and contraction rights, first right of refusals and options to purchase, can be categorized as opportunity costs, as they benefit tenants and inhibit your ability to lease or release your space in the future. The learning objectives of our courses address the strategy that all surrender, contraction or other lease termination rights should include a claw back of all unamortized leasing costs and provide a penalty to allow you to remarket and lease the space.

leasing in property management

One cost that landlords don’t always consider when calculating the NER on deals is the vacancy costs that are incurred while the space is vacant. These carrying costs can be significant and are directly tied to operating costs. Students consider examples such as the true impact of the carrying costs on a 10,000 square foot space with $30.00 per square foot operating costs, which works out to be approximately $825 per day, $26,000 a month or $316,000 per year to carry.

Many factors affect leasing and the elements that make up a successful leasing program. Therefore, it is essential for the success of a building that a leasing program is well planned and implemented by experienced experts. The knowledge that students gain through BOMI’s courses will position them well within the leasing team and assist them in maximizing the returns on their leases.

 

Peter D Willmott, BAS, CPM, LEED AP EB+OM, teaches several courses for BOMI, which lead to industry leading RPA and FMA designations. These courses include Real Estate Investment & Finance and Leasing & Marketing for Property Managers. Peter was a key member of the leasing team at the MaRS Discovery District complex, which used all its expertise to develop and implement an aggressive leasing program to tenant the new West Tower, raise its rental rates, NOI and its value.

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