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Caring for your Tenant

Hey there property owner, how healthy is your tenant?

Despite thriving economic conditions, it can be a hard knock life for a commercial tenant in Northern Colorado these days. A number of recent articles in local and regional publications have covered the impact of rising occupancy expenses for users in Northern Colorado. These rising costs have some tenants looking for refuge, maybe looking to relocate their place of business, or perhaps downsizing into a smaller space and sending a portion of their employees to work from home. Regardless, it is important to remember that a happy and healthy tenant is critical to the success of your property and you as the building owner. It is imperative as Building owners that you do everything possible to maintain close relationships with your tenants, keeping tabs on their business, and supporting them in creative ways to keep them happy and healthy.  

A few tips:  

  1. Get to know your tenants’ business, their industries and their needs. This will help you prepare for potential downsizing or growth that directly impacts you and your bottom line.  
  1. Work with your tenants in coming up with creative solutions in areas such as:

             - Rent payment schedules (timing of cash flows/costs for tenants can be critical)

             - Build outs costs with construction costs being at all-time highs  

             - Scrubbing every component of operating expenses (keep NNN’s at a minimum)

             - Holding promotional events for the property that in-turn provides promotional opportunities for tenants and their businesses

             - Be present, closely monitoring everyday operations of the property, ensuring your property is run in a first class and business friendly manner  

  1. Show your property some love now, don’t wait to maintain and update it until you are marketing for a new tenant. Your current tenant is there every day, so making little or big upgrades to their space and the common areas could really pay off when renewal time comes around.
  1. Work collaboratively with your tenant on lease renewals. If you heed the tips above, there should be no big surprises come lease renewal time.  Be realistic with the costs associated with replacing a tenant, as true cost of vacancy can be alarming.

A simple case study for you:  

Take a 2,500 square foot at $18/SF base rents plus $8/SF NNN ($26.00 gross), or $65,000 annually. In a best-case scenario, that space could easily sit empty for 3 months while it is listed, cleaned up, a new lease is executed, and a new tenant moves in. That would set you back $16,250 in lost income. The more conservative vacancy calculation is 6 months, or $32,500. That’s assuming that 1) your previous tenant was not in default and 2) you make no financial concessions during lease negotiation.  You can conservatively add another $10-15/sf ($25,000) for basic tenant finish allowances and leasing commissions. Get the picture?

That’s a decent chunk of change, especially when you consider that the #1 reason tenants leave is due to HVAC issues. An HVAC maintenance agreement runs about $0.30/SF, or $750 annually, in our above scenario. Proactive HVAC maintenance is a great investment if it keeps a tenant happy.  

A more hands-on and proactive approach to tenant relationships is the silver bullet with top of market economic conditions.   Not a problem for those owners who enjoy direct involvement in their assets.  However, this can be unfortunate news for those owners who pine for hands-off, passive real estate investments.  For a very minimal cost, owners can engage a property management company to manage high touch efforts.  The right property manager will treat your tenants as customers, maintaining close relationships, and understanding the importance of collaborating in tenant health, happiness and sustainability.  Your properties’ bottom line will thank you.