Saturday, March 07, 2009

Lease renewals in difficult times

In the period from December 2008 to March 2009 four of the leases on our properties either came up for renewal or entered the period when the tenant had the right to break the lease without penalty. In the current market, this was always going to be a tough time for my portfolio. Having been through a few downturns, I kn0w that the key to minimising the pain is minimising the vacancy period and the key to minimising the vacancy period is being willing to accept less than ideal rent levels and, to a lesser extent, being more flexible on negotiating lease terms. I expected to take a significant fall in rental income.

In terms of progress:

1. I have rolled over one lease for two more years with a nominal increase in rent;

2. I have an oral agreement to renew one lease for a further period of one year at the same rent and I am waiting for the tenant to sign the new lease;

3. one tenant exercised his option for early termination. This was no surprise given that the only lease was struck right at the top of the market. It was a little disappointing that the tenant was not willing to even try to negotiate a new rental level. However, a provisional agreement for a new lease has been signed with a new tenant. The rent is 22% below the previous rent. I could have held out for a higher rent but risked a longer vacancy period than the two weeks which this deal will result in. In any case, the new rent is fairly close to recent deals for similar units in the same development;

4. one tenant has said he is willing to renew the lease if we will give him a substantial reduction in rent and agree that he can terminate on one month's notice if he loses his job.

Assuming that I can agree the new rent with tenant #4, I will have managed to get through a period of potential pain with only a two week vacancy on one property (compared to a worse case scenario of having four properties vacant for months).

Also, with the assumption that #4 is renewed, I will still have the luxury of positive cash flow on our investment properties in spite of the net decrease in rental levels.

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