Some people were surprised – and some not so surprised – when Cotality reported that Brisbane’s median house value had For investors, shifting from a gross to net lease structure for their commercial properties can increase yields and reduce exposure to rising outgoings.
But a detailed eye is needed to navigate the change effectively. Any oversights in the transition can leave investors out of pocket through both returns and uplift in value, cause tensions with tenants and – in the worst cases – trigger legal disputes.
Managing tenants
Tenants are unlikely to accept a change to a net lease without questions. If market conditions or vacancy rates favour tenants, pushing a lease structure change without a compelling reason can result in failed negotiations or even an exit by the tenant.
At Bromley, we educate tenants through a combination of comparable market leases and our own historical knowledge. We pre-position tenants with what is happening in their neighbourhood such as increased competition triggered by new infrastructure, property resumptions and other factors that impact supply.
We provide tenants with a report on historical outgoings, giving tenants full transparency and reducing the chance of disputes.
Sector specialists
We have specialists across different asset classes which is critical in changing the structure of a lease.
For instance, in a neighbourhood retail centre, moving to a net lease might include adding a pro-rata share of maintenance in common areas, rates and public liability insurance. We know how to structure this equitably, so anchor tenants do not push the burden onto smaller operators.
In industrial precincts like Rocklea or Yatala, where triple-net leases are the norm, we’ve used market comparisons to shift a logistics tenant from a gross to net lease without pushback, especially if their rent is currently under market value (industrial rents have risen, in some cases, by 40% over the last five years in these areas).
Detailed leases that remove ambiguity
We’ve seen many instances where other agencies haven’t completed comprehensive redrafts of the lease agreement when transitioning to net terms. The wording of the lease changes has been implied, not specified.
If the lease still reflects gross terms, the slightest ambiguity can lead to a minefield, leaving the investor exposed to unrecoverable outgoings.
Switching to a net lease requires a detailed schedule of all recoverable outgoings (rates, insurance, maintenance, etc.). Many investors underestimate or forget to include certain costs, meaning they continue absorbing expenses they thought were passed on to the tenant. We’ve seen this happen far too often, with investors losing thousands – sometimes tens of thousands – of dollars a year.
Do net leases suit every situation?
No – net lease structures aren’t always the best option for landlords or tenants.
As an example, mum and dad or start-up retail tenants may struggle with managing variable outgoings and need the security of fixed rents to properly forecast their budgets and plans in these early years of business.
In any event, it’s important to reach out to a leasing agent for guidance.
At Bromley, our leasing agents work collaboratively with our property management division to ensure the design and implementation of lease agreements runs smoothly for both our investors and tenants.
With more than four decades of experience in leasing and asset management, talk to us today about how your lease is structured to optimise your asset’s performance.