Letting and Lease Management

1. Letting and Lease Management Lesson 4

2. Letting

3. Lease Definition of Lease • A contract between owner of real estate (lessor) and tenant (lessee) to transfer rights of exclusive possession and use in exchange for the payment of rent and other obligations

4. Requirements of a Valid Lease 1. Intention to create legal relations • Intended to be binding in law and court will make presumptions as to intentions of parties 2. Offer • Must be communicated and Conveyed 3. Acceptance • Acceptance must have no conditions attached (unqualified) and must be communicated and conveyed. 4. Consideration • For real estate all considerations must be in the form of money • To give something of legal value in exchange for a promise 5. Competent parties • Must be of Legal Age and of sound mind

5. Factors Affecting Lease Deal Your ability to get the lease deal you want depends mostly on factors out of your control: • Leasing market conditions • Importance of tenant to the development • Strength of tenant’s covenant i.e. the financial stability and profitability of the business

6. Typical Leasing Process

7. Transaction Filter • How marketing moves a prospect toward a successful transaction

8. Prospecting Hierarchy • Segment targets to reach the best prospects with the strongest tactics Connect with every potential target with broadcast tactics such as advertising, online listings, signs and network exposure Connect with the best prospects through personal contact such as calls and tours Connect with database list of appropriate targets through direct marketing flyers, mall and e-mail, and broker contact

9. Commercial Rental Structures • Gross Lease • Landlord pays for all expenses • Net Lease • Tenant pays for “pro-rata” share of determined expenses • A single net lease requires the tenant to pay only the property taxes in addition to rent • With a double net lease, the tenant pays the property taxes and insurance premiums • A triple net lease, also known as an NNN or net-net-net lease, requires the tenant to pay insurance premiums, property taxes and common area maintenance expenses along with the rent

10. Commercial Rental Structures • Percentage Rent • Tenant pays a fixed amount of rent plus a percentage of the gross income of the business. The percentage and basis agreed to between the parties • Most commonly used in retail locations • Specifics vary with the types of business and its location • Escalated Rents • Flat rent amount over a set period, increases periodically thereafter • Escalators contracted or based on consumer indices

11. Rent Setting Determining Rents • There is NO simple rule for how much rent a commercial location is worth • When renewing leases, the prosperity of the tenant has a direct bearing on any rental increase. Don’t Be Unreasonable • Success of both landlord depends upon the success of tenant(s). You don’t succeed if your tenants don’t succeed.

12. Financial Inducements • Offer a rent-free period • Offer rent rebate for existing tenants. • Offer a rent that is lower than the rents committed for the other units in the building • Offer to pay fully or partially for the unit renovation cost • Offer a longer fitting-out period

13. Tenant Mix • The tenant mix becomes very important whenever a property has more than one tenant • Successful tenants pay rent on time, meet all lease terms, abide by property rules and are unlikely to move out • “First Come, First Served” should NOT be used for tenant selections

14. Singapore’s Office Tenant Mix Changed in 13 years

15. “Why Strata Malls are Struggling to Survive? - Poor tenant mix and absence of coordinating body to do promotions cited as factors” - The Straits Times 08 Oct 2018 • Analysts say these kinds of malls often struggle to survive because they do not have a central management to oversee the tenant mix. • Even some that are quite new and in relatively good locations near MRT stations struggle to get any traction with consumers. • International Property Advisor chief executive Ku Swee Yong said: "Compared to a single-owned mall under a firm like CapitaLand, for instance, the strata-titled mall does not have a plan for the make-up of the mall or have a single coordinating body to do promotions or seasonal events. • "The worst is that once a tenant enters with a dodgy trade, such as money-lending or offering massages, the whole place becomes unsavoury and people will avoid it." • https://www.sgsme.sg/news/why-strata-malls-are-struggling-survive

16. Tenant Quality • Landlord should evaluate the economic viability of various business and anticipate their profitability • The depth of a tenant’s pockets is important in tenant selection • The two major reasons why businesses fail are undercapitalization and lack of knowledge about the business.

17. Strategic Approach

18. Lease Management

19. Common Lease Terminology & Standard Market Practices • Rental and Service Charge • Rental rates are usually quoted as gross rent in Singapore dollar per square feet per calendar months (S$psf/mth), comprising of Base Rent plus Service Charge. • Service Charge (between S$1.00 to S$1.30 per sq ft per month) is for centralised air-conditioning expenses during office hours, maintenance and security of the common area and other building’s outgoings. This charge may be subjected to adjustments if there are changes in the maintenance cost. • Lease Period • Lease Period is usually for two to three years. For multiple floor tenancies or anchor tenants, longer Leases can be negotiated. • Any Lease of seven years or longer has to be registered with the Singapore Land Authority. • Option to Renew • Option to Renew is usually for a period of two to three years and is usually at a rent to be agreed or reviewed according to the prevailing market rent, unless a rent cap has been mutually agreed between two parties in the Lease Agreement. Although rental caps are not common practice in Singapore.

20. Common Lease Terminology & Standard Market Practices • Possession Date • Possession Date is the agreed date between the Landlord and Tenant for the Tenant to take possession of the property. • It is usually one to three months prior to the Lease Commencement Date, depending on the size of the unit leased, and is often referred to as the “Fitting-out period”. • Lease Commencement Date • Lease Commencement Date is the agreed date for the commencement of rent payable by the Tenant. • Rent payments are ongoing monthly or quarterly for the duration of the Lease, unless otherwise stated. • Fitting Out Period • Fitting Out Period is the period between the Possession Date and the Lease Commencement Date for tenant to renovate the new premises. • Depending on the size of the premises and the prevailing market conditions, the period can range between two weeks to three months. Most Landlords will waive the payment of the Service Charge during this period although there may be exceptions.

21. Common Lease Terminology & Standard Market Practices • Rent Free Period • Rent Free Period occurs during the lease period whereby the tenant is not required to pay rental for the occupation of the premises. • Security Deposit • Security Deposit equivalent to three to six months’ gross rent, is usually payable upon confirmation of the Lease and it is refundable (without interest) at the end of the Lease. • The amount depends on Tenant’s financial standing/ paid-up capital registered under Accounting and Corporate Regulatory Authority (ACRA). • Renovation Deposit • Tenant is required to place a Renovation Deposit with Landlord to cover any damages caused to the common areas during the renovation period. It is typically S$10,000 or S$1 per sq ft lease. This deposit is refunded upon Landlord’s inspection of the renovation works. • Reinstatement • Tenant is required to restore and reinstate the office premises to its bare and original condition upon the expiry of the Lease at their own cost, although there may be exceptions.

22. Common Lease Terminology & Standard Market Practices • Legal fee / Stamp Duty • It is common practice that Tenant bears Landlord’s Legal Fee in relation to the preparation, negotiation and execution of the Lease documents. • Stamp Duty is a tax on commercial and legal document, which records and gives effect to transactions. It is paid by Tenant to Internal Revenue Authority of Singapore (IRAS). • The Stamp Duty rates as follows:

23. Common Lease Terminology & Standard Market Practices • Letter of Intent (LOI) • Letter of Intent (LOI) is a non-legally binding document and it outlines the main terms and conditions to be negotiated on by both the tenant and Landlord. • The Landlord will respond to the LOI submitted and may counter propose on several terms. • Letter of Offer (LOO) • After the main terms and conditions are agreed upon by both parties, the Landlord will issue the Letter of Offer (LOO) and a copy of Lease Agreement, detailing all terms and conditions. Both documents are legally binding upon acceptance. • Once the details are agreed between both parties, Tenant will sign the LOO and pay a booking fee equivalent to one month rental (subjected to prevailing GST). • Lease Agreement • The Landlord’s legal council will then present the Tenant with the Lease Agreement outlining the Terms and Conditions applicable to both parties as stated in the LOO.

24. Lease Management After Signing Lease Agreement Pre Move In • GIRO account • Fit out application • Utilities application • Fit out design and contractor procurement • Fit out approval from landlord • Fire safety inspection certificate • Move management Post Move In • Submission of as-built plans • Facilities management • Rent paying / arrears management