A lease is an agreement between the landlord and the tenant, giving them the right to run their business or operation in your property…
And there’s a saying in commercial property investing… ‘You don’t buy the property, you buy the lease.’
The agreement covers all the various terms and conditions of how you are going to lease that property to them – including how the rent is paid and how it is increased, who pays what outgoings, what happens if there is a dispute, what happens if they stop paying the rent, how much bank guarantee (which is like a bond) they have to pay, etc.
You can also negotiate virtually any point in a lease. It’s all up for discussion and both parties typically respect that none of the points are set in stone.
One of the benefits of commercial property is that solicitors and lawyers are generally almost always involved in the leases – so you are dealing with a business tenant who is going in with their eyes open.
A commercial lease is also much more powerful than a residential lease, because 90% of the time they are registered on the title of the property.
In fact, they are almost as powerful as a mortgage document, and they’re never entered into lightly by either the landlord or the tenant. It’s a fantastic document to base your investment on..
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So what’s considered long-term? Typically, anything longer than three years.
You’ll find the standard groups of terms for leases in Australia are three years with a three-year option, and maybe another three-year option after that; or, five years with a five-year option, and then another five-year option.
But if you look around online, you’ll often see that there are some properties – particularly properties like childcare centres, Bunnings warehouses, KFCs, ALDI stores, big franchise tenants and businesses like this – that have leases which could be 10 or 20 years in length, or two 10-year terms.
Long-term leases reduce your risk because you can plan ahead…
You’re not likely to be looking at any vacancy during the first term of the lease, and if there is a downturn in the market, or something unforeseen happens, generally that lease will carry you through that.
Plus, with a long-term lease, there is a more regular and steady income that is guaranteed for a longer period of time. This creates more certainty as you’ll be able to work out what the projected ROI will be over the term of the lease.
It also allows you to plan for locking in your interest rates because you can run the locked rate on your loan, or a part of your loan, in tandem with the term of your lease…
This can be a great strategy – if you have a five-year lease, you might consider locking in most of your loan at a good rate for that five-year period.
From a landlord’s viewpoint, there are pros and cons to both short and long-term leases, and the right choice for you will usually depend on the supply and demand of your property in your particular area.
And the most important thing? Never ever go into a lease feeling you have to win on every single point in the agreement.
It’s firmly in the interests of all parties to be flexible during negotiations, and to have an agreeable relationship during the term of the lease agreement.
To Your Success
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