Commercial Q & A

Capitalisation Rate

Also referred to as Cap Rate, is the percentage rate utilised to capitalise the net income to arrive at the current value of the property or its indicative selling price.

Caveat Emptor

Let the buyer beware. It also applies to a lease.

Change of Use

Refers to the development application to the Council by the lessee, to change the use of the property in order to carry out their specific type of business.

Price – Median

The middle number when data is arranged from lowest to the highest in sequence. If there are two median scores, they are averaged to provide the true median. The median is also known as the 50th percentile.

Security – After Hours

Forms part of the building’s operations and will be the responsibility of the building manager. Key card access, concierge hours of operation, security guard contractors for after-hours patrolling for example, are all matters which the property manager should be consulted for clarification.

Without Prejudice

A term when used during a negotiation, means any suggestion, plan put forward by one party cannot be used by the other party as evidence if the negotiation falls down.

Work Space

A common ratio used to measure the tenant efficiency of individual buildings floor plates. This ratio is calculated by dividing the total net lettable area by the number of people who occupy the floor space.

Wrap

The instance when a vendor is prepared to offer the buyer finance or other assistance such as staged payments.

Area – Lettable Gross

Measured in square meters, is the floor space contained within each tenancy at each floor level by measuring from the dominant portion of the outside faces of walls, to the centre line of internal common area/inter-tenancy walls.

Area – Lettable Net

Measured in square meters, is the floor space between the internal finished surfaces of permanent internal walls and the internal finished surfaces of dominant portions of the permanent outer building walls. It generally includes window frames and structural columns and excludes toilets, cupboards, plant rooms and tea rooms where they are provided as standard facilities in the building. It also excludes areas dedicated as public spaces or thoroughfares such as foyers, atria and building service areas.

Lease - Agreement

During a typical lease negotiation, leasing proposals are used as a medium to determine terms and conditions acceptable to both Lessor and Lessee. This will lead to a Heads of Agreement document or Memorandum of Understanding outlining the final position of both parties, and accompanied by a leasing deposit often equivalent to one month’s gross rental as a security deposit. This deposit is typically held in the leasing agent’s trust account to be offset against the first month’s rental or leasing fees payable by the Lessor.

At this stage, both the Lessee and Lessor are not legally bound to commit to the premises (unless otherwise stipulated in the documentation to date) however, the Heads of Agreement document provides a framework by which the Lessor is to instruct their solicitors to prepare the formal lease documentation. The signing of the formal lease document will legally bind the Lessee to the lease. This is accompanied by the provision of consideration (typically by way of a bank guarantee). The signing of the lease document by the Lessor will typically legally bind the lessor to the lease unless otherwise agreed or stipulated.

Lease - Covenant

An agreement between lessor and lessee covering certain things which will be done OR not done to the property.

Lease - Incentive

An inducement offered by the Lessor to attract new tenants to the building, offered in a variety of ways e.g. rent free, rent abatement , provision of or contribution to lessee’s fit out cost.

Lease - Commencement

The legal date of a lease.

Lease - Legal

Both the lessor and the lessee should be responsible for their own legal cost to prepare and review the lease document. It is not uncommon though that the lessor tries to get the lessee to pay for their cost (in addition to the lessee’s own cost).

Lease - Lessee

The party, whose name appears on the formal lease document, binding themselves to the terms and conditions stated therein, otherwise known as the tenant.

Lease - Lessor

The party, governing the formal lease documentation at a particular property, typically the owner or owner’s representative.

Lease - Make Good

The lessee’s obligation to reinstate the property back to a pre-specified state, once the lease period is expired. Unless it is agreed between the lessor and lessee, the reinstatement involves but is not limited to the removal of the lessee’s fit out, mechanical and electrical work, replacement of ceiling tiles, paint of surfaces and removal of redundant cables.

Lease - Notice To Quit

Notice to quit enables under specific and strict conditions either the lessor or the lessee to terminate the tenancy without seeking prior agreement from the other party.

Lease - Option

Extends lessee’s occupancy beyond the initial lease term. It is advisable to agree on the rent review pattern for this term as part of the initial negotiations. At the very least, both parties should agree to establish what the review pattern is to be for the option period within 6 to 9 months of the expiry of the initial lease term.

Lease - Option To Buy

Option to buy embodies the lessee’s right to buy the property at an agreed price within an agreed time frame.

Lease - Right of First Refusal

The right of first refusal can be negotiated as part of the lease whereby the lessor must offer the lessee the right to lease or refuse to lease untenanted space that is adjacent, adjoining or contiguous to the leased property.

Lease - Sub Lease

The mechanism under the provisions of the lease which allows the lessee to find a suitable replacement tenant. This is subject to Lessor approval and unless specifically stated, does not limit the lessee’s legal responsibilities during the term of the lease. Most commercial leases allow the Lessee to sub-lease or assign their premises. Typically, the Lessor is unable to unreasonably withhold consent to the sublease. A prudent Lessor however will consider the strength of covenant being offered by the incoming tenant and will be reluctant to accept the proposed sublease/assignment should their financial position/security be reduced as a result of the sublease/assignment.

Outgoings - Air Conditioning

The afterhours air conditioning cost per hour varies as a result of the age of the building and the type of air conditioning equipment installed within a building and is chargeable outside the hours of operation as stated in the lease. The cost criteria comprise energy, water treatment, air filters, allowance for depreciation, allowance for repairs, maintenance.

Outgoings - Base Year

Is the landlord’s year from which to calculate outgoing recoveries. The issue here is that the base date may not coincide with the commencement of the lease agreement. If the base date is different i.e. much earlier than the lease commencement date, it may be a short period into the lease agreement before the tenant is invoiced the reviewed/increased share of the outgoings.

Outgoings - Increases

The Lessee will be responsible for a proportion of any increase in the total operating expenses relative to the year or part thereof. The proportion will be calculated in accordance with the lessee’s percentage contribution as specified in the lease.

Operating expenses will be defined in the lease and will vary from building to building. The base year is the nominated year stated in the lease. An increase in outgoings over the amount agreed for in the base year will be calculated following an audit of the various charges at the end of the financial year, typically undertaken by the property manager, the base year outgoings figure will be subtracted from the outgoings amount for the current year, the difference being allocated to the building’s tenants on an area proportionate basis.

Outgoings - Makeup

Outgoings means total of all costs, charges, rates, taxes, fees, expenses the lessor is liable for in respect to the whole of or any part of the building. Taxes mean a tax, levy, duty, impost, fee, deduction, withholding or charge imposed by law. The cost elements are statutory Charges, municipal rates, water rates, land tax, car parking, operating expenses, insurance premiums, repairs and maintenance, air conditioning, lift and escalators, energy expenses, security, building supervision, fire protection, pest control, plant hire, gardening, cleaning, rubbish removal, administration fees, general expenditure.

Outgoings - Secondary

Being all other costs associated with operation, upkeep and/or maintenance of the building e.g. air conditioning, lift maintenance, common area cleaning, security and electricity.

Outgoings - Statutory

Includes costs such as municipal rates, water and sewerage rates and usage charges, council car parking levies and land tax.

Rent - Abatement

An agreed fixed monthly reduction amount against the total rent, spread over a selected period of the lease or over the entire period of the lease.

Rent - Cap & Collar

A term and method used in some market review clauses. It is a mechanism that caps the maximum amount by which the rent can be increased, or a ‘collar”, the maximum the rent can decrease, on the nominated market review date.

Rent - Commencement

The legal date of when rent payment starts which would be different to the lease commencement date if the lease incorporates a rent-free period.

Rent - Effective Gross

The rent net of all incentives and including all building outgoings.

Rent - Face Gross

The rent excluding any incentives but including all building outgoings.

Rent - Face Net

The rent excluding any incentives and building outgoings.

Rent - Free

Applies for a number of months from lease commencement date whereby the lessee is exempt from paying the agreed base monthly rent. The exemption excludes the agreed outgoings.

Rent - Peppercorn

Lessor’s agreement to rent a property at no cost to a lessee while retaining all ownership rights.

Rent - Ratchet Clause

The mechanism whereby the reviewed rental cannot be less than the previous year’s rental.

Rent - Review

The method by which your rent can vary during the term of the lease, either by a market review, a predetermined figure or fixed to an index such as the CPI. The review structure for the duration of the lease period is agreed to prior to the lease commencement.

Rent - Review (Types)

Most Lessors will have a standardised lease proposal for their building which will include a rent review pattern which has been pre-agreed in light of the Lessor’s own objectives and current market conditions. Typically. the two most significant influencing factors on rent review patterns are lease term and the commencing rental. Rent review methods may include fixed increases, structured increases, reviews to market levels (with or without a ratchet clause), CPI plus a fixed percentage.

Warehouse - Distribution

Modern, conventional industrial space with close proximity to road networks, offering mostly a lettable area over 10,000 square meters, high clearance with a small office component of approximately 5%.

Warehouse - Hi Tech

Modern, conventional industrial space with close proximity to road networks, offering mostly a lettable area over 10,000 square meters, high clearance with a small office component of approximately 50% to 90%.

Warehouse - Prime

Modern industrial space in a prime industrial precinct with a lettable area ranging from 2,000 square meters to 10,000 square meters with an office component ranging from 10% to 25%.

Warehouse - Secondary

Conventional industrial space with a lettable area ranging from 2,000 square meters to 10,000 square meters with an office component ranging from 10% to 25%.

Yield

Divide the annual net income by either the current market value of the property or its selling price.

Yield - Equivalent

Divide the net income (comprised of the initial rent, any changes during the leasing term, holding costs, current market rental level, current market vacancy rate, relative costs to the vacancy rate e.g. leasing fee, incentives and holding cost of property during the vacancy period) by the price.

Yield - Equivalent Reversionary

Divide the initial income inclusive of a factor allowing for market reviews, impending vacancies and current vacancy rate and potential relative costs.

Yield - Initial

Divide the annual net income being paid at time of purchase by the purchase price. This yield does not take into consideration the variables the property could be exposed to during ownership. For example, future rent growth or reduction in line with market conditions, vacancy factor or variances in holding costs.

Yield - Market

Annual net rent reflective of market rental levels divided by the purchase price.

Yield - Reversionary

Divide the net income applicable when the lease is next reviewed to market level by the price. This type of yield is mostly considered when the current lease is either over or under market rents and the lease does not include a “ratchet clause”.

Contact us if the above explanations do not answer your specific query.