The Logic of Landlord

The intricacies of the logic of most landlord is at first easy to envision. A landlord wants a return on and of his investment over the period of time they own the property. Now that being said there are many myths that a Tenant should dismiss.

Myth #1, An empty space is ALWAYS a terrible thing and the Landlord should take a very low offer of rent, rather than leave it empty.

The fact is the prudent Landlord has foreseen the potential for vacancies and has prepared for it. A landlord will find that accepting an offer for 40 or 50% less than the market rents, just to fill a vacancy will accomplish several negative results for the landlord and the property.
First and most obvious is the reduction in annual net revenue. 50% rent reduction for one space will take 6 month to recuperate each fiscal year. This means the Landlord could leave the space vacant for as much as 18 months while looking for a fair market tenant willing to sign a 3 year lease, rather than sign a lease, only to have a space filled.
Another result of accepting a low rent for space in a multi-tenanted property is it may, in effect, lower the "normal" market rents, therefore, lowering the rent in subsequent vacancies and in some cases even existing leases. Once a rent is accepted, it often becomes known by the market in general, or the very nature of the type of tenant the Landlord accepted a low rent from will reduce the viability of the balance of the Landlords building. More knowledgeable prospective tenants will know what a certain industry is capable of paying for space. They can then deduce that rent for some tenants is significantly less.
Yet another probable effect of accepting a low rent is the overall value of the building is reduced significantly more due to the net revenue reduction, than by having a vacancy. Potential buyers/investors for the property will give more credit for a vacancies potential than the lower rents will actually realize. Investment real estate is valued based upon the quality and quantity of the net cash flow. A 40% reduction from market rents will reduce the value of the building by 40%, while a 40% vacancy in itself will not reduce the value nearly as much, unless the market is also factored into the equation. While the building may not be for sale at this time the original fact is still very relevant: A Landlord wants a return ON (income over and above his investment) and OF (sales proceeds returning the original purchase or cost) his investment.




Myth # 2, Rent a Landlord receives is really all profit because he still has the building after the lease is completed.

Most Landlords have equity in the building they own. Many have a significant mortgage on the property. Often after paying the Landlord itself a fair return on the equity investment and the mortgage (along with the return the bank requires – i.e. interest), the Landlord will make very little "Profit" from the rents it collects.

Myth #3, Landlords always want the most rent they can get and don’t really care what the tenant’s issues are or who they are.

While this can be a true statement, most prudent Landlords are exactly the opposite. A good Landlord will want a fair market rent for it’s property. A multi tenant building Landlord will want his tenant mix (the types of businesses) to be very well thought out and effective. To give an extreme example for demonstration purposes, If a Landlord has an anchor tenant with the use being a moderately priced family dinning restaurant, an any sex hair salon, and a general dollar store, that Landlord will most likely search and give preference to such other businesses as a children’s or ladies clothing store, an electronics boutique, a tanning and nail salon or possibly a video rental business because any of these type tenants will feed and feed off of the existing tenants, thus making all tenants enjoy a better business and not encouraging them to leave when the lease renewal time comes. On the other hand the Landlord would most likely not show preference to a business that would either deter consumers from frequenting those existing tenants or even those that would not increase the potential of the existing tenants. For example, an adult bookstore, a pawn shop, a barber shop, an accounting firm, or even a very exclusive art gallery. While all these establishments are very possibly good tenants, they would not be the best choice for this building. The more obvious conflicts might be the adult bookstore could alienate the existing tenants and their customers, and the pawn shop often (but not always) demonstrates a declining neighborhood and could cause a reduction in the current trade, or at least shift the demographics of the clientele. One that is a little less obvious would be the accounting firm. While such a professional business would not alienate the current tenants or their customers, it would also not likely add anything to the mix. Finally, the barbershop would directly compete with the any sex hair salon, which may very well not be listed in the lease as an exclusive but would likely reduce the business of the existing tenant and simultaneously not maximize the potential of the new tenant. Both are likely to want to move by the end of their lease.







Myth #4, The longer a tenant signs a lease for, the lower the rent should be. AND, the more space the Tenant signs a lease for, the lower the rent should be.

While to some extent this is possible, some interesting points should be made. Many things must be taken into consideration when the length of a lease or the size of a Tenant’s space is considered, that at first glance seem irrelevant.
First, the length of the lease; Most retail Landlords understand that a term must be long enough to reduce the continual turn over of tenants in a building. Tenants moving in and out will tend to reduce the viability PERCEPTION of the building and it’s location. So often a Landlord will be happy to negotiate a slightly better rent for a longer term lease. However, it is also true that real estate markets change. Often a Landlord will willingly accept a 3 year lease from a neighborhood type tenant, but will fret a little when they expect a reduction in rate as a trade for a 5 year lease. This is overcome by establishing some formula for rate increases over the period of time if the expectation of market increases is strong.
Now regarding the size of the space. Unless the building as a whole is the indicated lease space, a Landlord must look at the potential of replacing the tenant in the future. Should the landlord allow a tenant to combine several spaces into one and occupy a large percentage of the building, that Landlord must weight the possibilities of default on the lease and eventual termination of the lease very heavily. While the immediate gratification of leasing such a large space is significant, the unforeseen negative ramifications are often horrible. What will the chances be for replacing the tenant later be? What will the new tenant’s effect be on the rest of the buildings current or future prospective tenants? What will the reduced rent for the larger space do to the net revenue stream of the building and does that combined with the potential higher risk decrease the value of the building?

There are many other perceptions and Myths regarding the Landlord and it’s investment, and there are many truths. As one might surmise the individual landlord and their specific investment goals are very often a determining factor in many decisions made regarding the rental rate, the tenant mix and other terms a landlord will accept.

One very important idea to keep in mind as a potential tenant, is that a Landlord is only a business owner. The Landlords product that it sells is space. Space sold for a given time and under a given set of terms. With that in mind try assuming that the Landlord sells shoes, or cuts hair or rents automobiles, while some negotiations are possible with these type products, most people would not presume to make the same assumptions as they often do when looking for space in a small shopping center. Just how much care would be taken by a barber who just agreed to cut your hair for ½ price? As with most things in life and business, the old adage of "You get what you pay for" seems very appropriate.

A good Landlord will desire stable tenants who pay as close to market rents as possible. They will look for a tenant that will enhance the traffic to the shopping center, mix well with the other tenant types, and stay put for a while. Not-so-good Landlords are looking for only the highest rents no matter what the rest of the story is. Those Landlords only benefit on the short term. That does not tend to support stability and will eventually negatively effect the value of the property.



Next, We look into the "Logic of a Tenant"



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