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Ten key points for managing a change of tenant

posted Jul 14, 2010, 3:20 AM by Joan Miquel Joaquim   [ updated Jun 20, 2011, 2:10 PM by X Juez ]
Over the life of any real estate asset in return at some point a change of tenant can be needed. This situation can obbey to the following reasons: 

  • Termination of leases :
    • Tenant does not extend the contract 
    • Owner does not extend the contract. Change in operators’ mix strategy in the portfolio
  • Negotiating out for economic reasons the tenant. At the present juncture, sometimes the inability of tenants to continue their business even with a contract in force drives the owner to find a replacement and a negotiated solution to the tenant. 

In any case, a change of tenant is a complex and multifaceted action that needs to combine the strategic, operational, technical, legal, communication and negotiation perspectives, and requires professionals (asset managers) that dominate these sites with an eye on the two main objectives: profitability and increased asset value. 

What points should be taken into account? We have established a list of ten, which we believe are final: 

1. KNOWING THE OBJECTIVES: The asset manager must know and be involved in the main objectives of the change of tenant to the landlord. How will the new tenant create value for the landlord? What kind of tenant is needed (multinational, national company, local company) to balance the portfolio? In low demand scenarios we may have difficulties to choose the tenants, but if the goal is clear, we can tailor our offer and our marketing efforts to target, and this means to have an intensive and extensive knowledge of the market. But the big question is: Can we reach the target and measure its achievement? What parameters will be needed? 

2. RECIPROCITY: The objectives of the new client also should be a priority. The asset manager must identify the key issues that affect and influence their decision making and insist on them in the negotiation. 

3. ASSET: The location of the asset and its ability of it to be flexible and adaptable to different customer needs are crucial. It is is essential for new client’s decision making to have an asset that allows operations from the first day. Sometimes happens that some old buildings in which a change of tenant is going to be done, the change of activity license involves an adaptation to the new regulations that can be expensive and sometimes it can became a barrier to entry or at demands for free rent periods. It is essential to have an asset that will ensure the minimization of fit-out works for the new tenant. This requires a medium-term work, since the decision to design and location, technical and market knowledge, capital expenditure planning (CAPEX) and carrying them to reach the turning point in the best arrangement.The question now is: What issues should take into account both in the design, location and in the planning? 

4. RISK: The risk-profitability balance is essential. Landlords are currently looking for solvent tenants and medium-long term relationships. The components of risk should be offset by increased profitability and this point should be measurable. The establishment of a rating of the portfolio and decision-making tools can help us to plan and measure. In a scenario of crisis elections can be restricted, but it is important to know at least what targets the medium and long term in terms of market operators, industries, etc. 

5. CONTRACT: The lease will make the relationship with the new tenant and it is important to focus on problematic issues and close them. Aspects such as price, duration, guarantees and responsibility are basic but they are not alone. It is important not to let the relational  and operating aspects in the air. This points should be closed. Having in the team work professionals who know the day to day and the basic functioning of these relationships is essential. 

6. OUTGOING TENANT: If a tenant arrival matches the leaving of another, contractual and operational planning is critical.  Dates should be known previously, the contract termination should be signed in advance and the output processes should be monitored, so that the arrival of new tenant to was assured on the date specified and in the best conditions. 

7. OPERATIONS: It is interesting to have a figure with experience that can anticipate problems of the move in order to plan the operation effectively. Anticipating difficulties and acting to minimize them increases customer satisfaction and profitability in the short term to the landlord. 

8. STATE OF THE ASSET: Knowing the status of the asset at all times is basic. The new tenant must come with a factory in perfect working condition. Knowing in detail the state of the building is needed in order to plan the repairs in advance. 

9. IMPROVEMENT WORKS COMPLETED: I must be known in detail the fit-out works undertaken by the previous tenant. Some may be of interest to any new tenant and must be agreed with both the old tenant and the new tenant the conditions under which such works would remain. Logistics facilities such as pallet docking, machinery, communications may be susceptible to this type of agreement. 

10. STARTING UP: For the implementation and adaptation of the new tenant of the building is essential to maintain a continued presence of a representative of the property (property manager) with sufficient technical knowledge to help in this adjustment and coordinate the activities of the new tenant, monitor the repairs that have left undone the previous tenant and other activities such as obtaining administrative permissions. 
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