When you purchase a commercial property, you will know the rent collected from the tenants under the existing leases. However, when you take that matter to greater review, you can find other income opportunities, particularly third income streams. It is a strategy to think about in property investment.
Of course, property investment is all about ‘cash flow’ and where that comes from. So, what are the first two income streams if we have ‘third income streams’? Of course, the first income stream is the base rent recovered from the tenants given their leases.
The second income stream is the recovery of outgoings for the property and from the tenants given the leases and the terms of those leases. Checking the recovery of outgoings against a budget for the property is a good idea and should form part of the annual property business plan.
The ‘third income streams’ in an investment property apply to other rents and occupancies that can be created, given the property’s design and tenancy mix. Most properties have extra income potential when you look at the overall operations and opportunities. Again, an experienced commercial agent would know what to look for and help you there.
So, what would the other rent be? It’s simple, and a professional agent with plenty of experience would know what to look for and then create those income growth points. Those extra rents will be coming from things like:
When considering a property with multiple tenants in occupancy, many potential extra property uses could assist those tenants or outside parties. It’s all about extending occupancy where needed and where it can help the tenants; the extra income is then structured on some documentation and flows to the landlord.
A case in point would be a retail shopping centre or an office building with multiple tenants. Some tenants in the property would want ‘extra’ areas to apply to their use of the property. So that is where extra rent would apply for special areas used by the tenant. Food retailers commonly take up the extra space for ‘outside dining’ as an example
Generally, those newly defined areas are supported by negotiation to a final rent figure and a licence document that explains the terms and conditions of occupancy that a tenant would adhere to as they use the area. That licence is necessary for several reasons, most notably the risk management that would come with whatever the tenant would use the special extra zone for.
When you consider things further, and take a shopping centre as an example, outside dining frequently happens with some food retailers. Those different dining areas could be outside the defined premises under the lease. So that is where an additional licensed site can be created with a small plan, a licence document to explain the area use and a fixed rental. Licences of this type tend to be for shorter terms of, say, 12 months and are renewed as required for the tenant(s).
So, the next time you look at a property to purchase, or if you already have a property of a suitable investment type, consider where you can get extra rental over time. Then, split that rental as a separate income code in your property performance report. Then, set about marketing those additional income streams to the existing tenants wanting ample space for some particular use.
AUTHOR
John Highman
0417 221 108 | j.highman@rwsp.net
Ray White Commercial Gold Coast
Shopping Centre Sales and Leasing Specialist
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