Strip mall occupancy costs

If you are a renter, homeowner, or real estate agent, when looking at a retail property, what needs to be quickly understood are occupancy costs and expenses and their relationship to investment and lease combination.

Occupancy costs and expenses can make or break the future of the tenants business and investment income for the landlord. High or uncontrolled occupancy costs and expenses mean an unattractive investment; It is not a desirable fact when you are going to sell the property one day.

Occupancy costs and expenses will reach their own averages for a given property type in a particular area. Then you have some consistency from which you can evaluate the property’s performance at different locations and comparable properties. If a particular property has higher than average expense expenses and therefore occupancy costs for tenants, then you must have an acceptable reason for it. Without a valid reason, the property will fail as an investment and net income will fall. Tenants will not want to take up space in a property that has a high occupancy cost to them.

This is the main reason why many tenants today are moving towards gross rents as a method of leasing; controls your known occupancy cost over the term of the lease. When they place this type of rent with fixed rental reviews during the term of the lease, the tenant knows the costs to be covered as the lease progresses. The tenant may be happy, but the landlord may not be. A property business plan and rental strategy are critical to making this work; particularly so in complex commercial properties. The costs of managing a retail property are considerably higher than those of other types of properties. Strategy is everything.

Landlords who adopt gross rents for tenants in their building must take a careful look at expenses and manage them well. While the tenant will be happy and know what the costs are doing, the landlord will be affected by changes in expenses, which will carry over to net income or “bottom line.”

Occupancy costs and expenses are typically divided into controllable and uncontrollable groups. More particularly, the uncontrollable occupancy costs will be those associated with legal expenses such as municipal fees, water fees, and land taxes. They are applied to the property based on the regulations and assessments of the city council; therefore, the charges must be paid each year regardless.

It is the controllable expenses and occupancy costs that will be manageable. This is where the property manager or owner should exercise due care and strategy. The goal is to get controllable expenses and occupancy costs within acceptable averages for a property of a similar type in the local market. When it does, the property remains competitive in the local market. So you have happy tenants and a lower vacancy factor.