week 6 - industrial and commercial PM

Question 1

defining types of industrial property

Answer 1

o Heavy manufacturing - Steel works and fabrication, injection moulding

o Light manufacturing = food manufacturing = processed foods, biscuits, coffee, beer, sauces etc.
o Light manufacturing (assembly) - pharmaceutical, printing and packaging (e.g. import bulk spices and repackage for sale)
o Storage, warehouse, distribution, office
o Production, storage and distribution of tangible goods
o Refers to the transformation of raw materials or components into finished products and extends to packaging, warehousing, distribution and self-storage etc

Question 2

explain the feature of an industrial real estate market

Answer 2

o Classification by use of site – general, special or single-purpose
o Heavy capital investment – large share of operating funds
o Investors risk – specialized nature large size, liquidity = risk
o Sale-leaseback – sell chosen site to investor then lease
o Functional obsolescence –technology can change building use out of date

Question 3

define general purpose industrial

Answer 3

General Purpose = highly adaptable to multiple users and potential future tenants and income.

Question 4

define special purpose industrial

Answer 4

Usually purpose built facilities on long term commitment leases.
(Generally) Heavy capital investment – An owner occupier may have to tie up a large portion of the business’ cash flow to the property, where this may not be the primary business objective/most efficient use of the funds, this is of course in contract to a Property Investor.

Question 5

explain investor risk

Answer 5

property being a non liquid form of investment, assessing the future transactional risk profile of property is a key measure.

Single use built property will have a limit of potential future tenants and purchasers.

Sale Lease Back = A business can reduce the occupancy costs and create available funds whilst securing tenure.

Question 6

define functional obsolesence

Answer 6

“A loss in value within a structure due to changes in tastes, preferences, technical innovations, or market standards. Functional obsolescence includes excess capital costs and excess operating costs. It may be curable or incurable.

Question 7

define election critera

Answer 7

= factors that may increase income or value and reduce risk…
Speculative building [pg 518 and 519] = not generally seen here, developers assesses market prior to build. Specific fit out generally dealt with during lease negotiation e.g. incentive provided

Question 8

industrial owner and investors

Answer 8

Often owned by users otherwise REITs and other private and institutional investors

Value certainty of income growth in asset value and low obsolescence

Question 9

demand influences of industrial

Answer 9

Economy, politics, industry specific business cycles, foreign trade and tariffs, availability of raw materials technology development, number of employees, land use laws, corporate location decisions – market orientated, resource orientated, labour orientated

Question 10

supply influences of industrial

Answer 10

Land use controls, pollution/transport regulations, conversion of space to alternate uses, government incentives, removal or consolidation( movement) of space from/in the market

Question 11

3 performance objective of property managers are

Answer 11

The three main objective are;

1. Increase revenues  
2. Minimisation of operating expenses  
3. Protection of the asset

Question 12

explain the 3 performance objectives of industrial PM’s in detail

Answer 12

Performance objectives are generally the same for each property area – same principles regardless whether residential, retail, Owners Corp, office.

Increase revenue/value: Only to the point where it’s commercially viable for both parties, pushing tenants away or having tenants go bankrupt does not increase revenue for your client.
Increase revenue is generally the main motivation, however there are instances where other, non monetary factors are the main motivation – consider non for profits, government organisations, church held assets, charities etc, air traffic control assets etc.

Minimisation of OP EX = no benefit for either party to overpay. Low operating expenses make the property more attractive to tenants. Assessing council rates valuation and putting service contract out to tender are some options to manage this.

Protection of the asset = the asset it self e.g. ensuring the property is maintained and the mechanical is serviced to prolong the economic life of the assets; though also the location factor of the asset e.g. planning approvals for neighbouring properties, dispensation of car parking applications (can have a great effect if your occupant is reliant on street parking).

Question 13

creation of tennancy

Answer 13

Property assessment: what are you going to offer to the market?

Market assessment: who is likely to want or need what you are offering?
What is the probable rent?

Legal assessment: are there any special legal or statutory requirements

Question 14

what is market rent

Answer 14

Market rental is the estimated amount for which an asset should rent, as at the relevant date, between a willing lessor and a willing lessee in an arm’s length transaction, wherein the parties had each acted knowledgeably, prudently and without compulsion, and having regard to the terms and conditions for leases of similar assets.

Question 15

explain legal assement

Answer 15

Legislative requirements? (Building codes, dangerous goods handling)
Make safe building works required? Are floor loadings sufficient? Are loading docks compliant for potential use?
Contractual agreements with other tenants?
Special contractual instructions required from the landlord? Eg. Noise reduction technologies may be required by tenant to comply with EPA requirements
Planning/environmental restrictions on use? Light, medium or heavy industries?

Question 16

define net lease

Answer 16

Lease agreement where the tenant pays a base rent amount and pays for (contributes to) property running expenses such as taxes, maintenance and repairs. May favour L/L as all cost reimbursed by tenant

Question 17

define absobrion rate

Answer 17

Floor space that has been leased in a given period (usually annually) expressed as a percentage of total floor space available. A supply and activity indicator.

Question 18

define vacancy rate

Answer 18

Total vacant space expressed as a percentage of total available floor space.

Question 19

pm in lease negotiations

Answer 19

PM (or leasing agent) acts on behalf of the lessor/owner to:
solicit offers to submit for their consideration/acceptance
negotiate terms ensuring all offers, counter offers and acceptances are agreed in writing
avoid misleading or deceptive conduct

( Section18(1) Australian Consumer Law )

Landlord and Tenant Act - general legislation that broadly defines the relationship between tenants and landlords.
Covers: recovery of land due to default, disposal of abandoned goods, notices to quit, procedural matters when contractual agreement breached
Industrial activity likely to be impacted upon by other legislation

Question 20

define income

Answer 20

Base (contract) rent may be adjusted upward via regular escalations (fixed or according to an index)

Question 21

define expenses

Answer 21

Usually net lease where tenant pays for all expenses
(may include garden maintenance, prorated
rates/taxes/insurance and capital works as a result of their particular use over time)

Landlord pays for all leasing costs, tenant incentives and management fees

Question 22

tennant selection

Answer 22

o Spatial…..does the tenant really know what they need? Truck parking bays?
o What is the tenants’ business? Is the building suitable for intended purpose?
o What sort of office and main floor layout does the tenant require? Is noise a problem for office staff?
o Conference facilities?
o Training spaces?
o Storage?
Car parking?

Financial Capability of Tenant:
o	Established credit history?	   
o	Bank guarantees for performance?	   
o	Individual or company?	   
o	Previous rental history?	   
o	Does the tenant have a current lease? If so when   does it expire?	   
o	Why are they moving?

Question 23

key lease clauses

Answer 23

1. Demised premises
2. Use
3. Rent
4. Rent reviews
5. Outgoings
6. Repair
7. Quiet enjoyment
8. Default
9. Making good

Question 24

explain a demised premises

Answer 24

= Explicit definition of the premises to be occupied by the tenant including fixtures, fittings, furnishings, plant, machinery and equipment (installed at the start or during the tenancy)
o Define lessor and lessee responsibilities in relation to maintenance and repairs
o Append a plan drawn to scale
o Not a must to have a plan append to the lease, but a good practice

Demise (example):
In consideration of the Premises and the obligations on the part of the Lessee to be performed and observed under this Lease, the
Lessor leases the Premises to the Lessee who accepts the Premises on the terms and conditions contained in this Lease.

Question 25

explain the clause of “use”

Answer 25

Use:
o Explicit definition of intended use of the premises by the tenant
o Usually expressed in negative terms
o Important for tenant to ensure it is wide enough to cover all business operations

Example:
The lessee must not:
1. Use the premises for any purpose except the permitted use,
Trade under any name except the lessee’s trade name (unless
2. another name is approved by the lessor, or,
3. Apply to an authority for any licence, consent or approval to use the premises for a purpose other than the permitted use.

Question 26

explain the clause of rent

Answer 26

Rent:
Including amount, date of payment, place of payment (e.g. bank account details)

FOR EXAMPLE
Base Rent
(a) The Lessee covenants and agrees that it will pay to the Lessor the Base Rent in respect of each Lease Year throughout the Term.
(b) The Base Rent is payable in full in advance by equal monthly instalments on the first day of each month.
(c) If this Lease commences or ends on a day other than the first day of a month, the first and last instalments of Base Rent must be proportionate on a 365 day basis.

Question 27

explain the clause of rent review

Answer 27

Rent reviews:
Exist to increase the rent and adjust it to market
o Must follow procedure within the lease
o Types of rent reviews: market, fixed, CPI

FOR EXAMPLE
Base Rent Review
(a) On each Review Date the Base Rent will be reviewed to the lesser of:
(i) the amount calculated in accordance with the following formula: R=BR x CCPI / PCPI where:
R is the Base Rent payable from the Review Date;
BR is the Base Rent payable for the Lease Year immediately preceding the
Review Date; and
CCPI is the Current CPI PCPI the Previous CPI
(ii) the Base Rent payable for the Lease Year
immediately preceding the Review Date increased by 3.5%.
(b) The Base Rent payable from each Review Date must not be less than the Base Rent payable immediately before the Review Date.
(c)The Base Rent payable as and from each Market Review Date will be an amount calculated in accordance

Question 28

explain the clause of outgoigns

Answer 28

o Usually comprise increases in rates & taxes and other running costs of the asset
o Annual estimate calculates outgoings contribution for the year
o Adjustments are made at the end of the financial year
o Types of outgoings:
Statutory (council or govt rates & taxes)
Variable operating expenses

o Outgoings are often charged up front, at beginning of the year. Estimate, or based on last year’s costs.
o Outgoing plus contingency amount – at end of year if outgoings were less, then refund the tenant
o Land taxes, council rates, govt charges (fire levy etc)
o Variable – air-conditioning, electricity, water

Question 29

explain the clause of quiet enjoyment and examples of a breach

Answer 29

o Express covenant by the lessor that the lessee may peacefully occupy and enjoy the premises during the term without any interruption by the lessor

Examples of breach:
1. Acts or omissions on adjoining property
2. Obstruction of access
3. Actions from another lessee
E.g. Quiet enjoyment = The lessor agrees that while the lessee complies with its other obligations under this lease, the lessee may occupy and enjoy the premises during the term without any interruption by the lessor.

Question 30

explain make good clause

Answer 30

b. Consider how, when and in what condition the premises are to be returned to the lessor by the lessee
c. Will also consider items not removed by the lessee and failure to remove the lease’s equipment
d. This and rental clause are the two most highly negotiable clauses in the lease.
e. Landlords are asking for cash settlement rather than make good – as can re-lease in current form if it meets the new tenants space requirements.

FOR EXAMPLE
Lessee’s makegood obligations
During the last seven days of the term, the lessee must (unless the lessor has agreed to do the work and the lessee has paid the lessor the agreed cost for doing it): a. Remove from the premises:
• The lessee’s equipment, stock and all other property of the lessee
• Any fixtures or fittings installed in the premises for the lessee which were paid for by the lessor,
o Repair (by replacement if necessary) all damage caused by the installation and use of the lessee’s equipment (including replacing floor coverings and ceiling tiles that have been holed, filling in holes, removing cabling, and restoring original surfaces to walls, floors and ceilings)
o Re-alter any alterations made to the premises or any services,
o Remove all lettering, signs and other distinctive marks from the premises and
o Repair any damage caused to the premises in carrying out the work required by this clause
So that the premises are converted back into a vacant shell in their original condition prior to any alterations being made by or for the lessee

Question 31

what is overholding

Answer 31

is when the tenant remains in occupation following the expiry of the lease terms, and is agreed by both parties.

Make good is generally required to be completed prior to the expiry of the lease.

Question 32

explain essencial services

Answer 32

• Part 11 Building Regulation 1994
• Essential services
• fire and safety items installed or constructed in a building to ensure adequate levels of fire safety to occupants over the life of the building.
• normal fire safety equipment - sprinklers, fire doors, fire rated building fabric, paths of travel to exits etc.
• Only applies to buildings constructed post 1st July 1994

1. Egress and access; fire doors, fire isolate pathways, ramps, stairs etc.
2. Electrical services; emergency lighting, emergency power supply, waring systems, exit signs
3. Fire detection & suppression equipment; control centre, extinguishers, hose reels, smoke alarms etc.
4. Mechanical services; smoke vents, stairwell pressurisation, fire dampers, fans etc.
5. Asbestos; landlords and tenants have defined duties relating to exposure. Must identify risk, control (remove), review risk and provide notices

Question 33

explain environmental cnsiderations

Answer 33

Energy Consumption
- natural lighting, energy efficient lighting systems, automated and sensor controlled lighting, insulated wall panels, high performance glazing, onsite energy generation (solar panels)
Water Consumption
- water saving design initiatives - rainwater harvesting tanks, rainwater re-use in amenities and landscaping, water efficient fixtures and drought tolerant plants and landscaping
Carbon emissions
- Mainly from electricity consumption, fleet vehicles
Waste Management
- implement best practice waste management and recycling practices.

Climate Change

• minimising contribution to climate change
• adapt processes, develop and operate properties resilient and suitable t the local climate

Building Resilience and Adaptation
- Environmental risks eg. Earthquake or Flood
- Need to increase structural design, back-up power generation, elevate key
plant and equipment
- Put in place emergency communication procedures.

Building Materials and Supply Chain

• use of specified materials and suppliers Eg. Certified timber. National and international standards
• ethical behaviour, supply chains aligned with key policies, .Eg avoidance of modern day slavery.

Biodiversity and Habitat

• meet legislative requirements to protect and manage biodiversity and habitat.
  - enhance local environment
  - land rehabilitation
  - water sensitive urban design
  - green corridors; native species in landscaping.

Question 34

explain infill strategy (environmental resolution)

Answer 34

Use of brownfield sites and existing urban areas – gives proximity
to customers, supply chain and major infrastructure such as sea
ports, rail and airports, while preserving undeveloped land.

Question 35

why adopt CSR

Answer 35

Community standards are changing

- Increases employee well-being and reduces sick leave and absenteeism by 39%
- Increases worker productivity 7-9%
- increased efficiency – green buildings use 69% less electricity!
- reduce workplace bullying, global ‘slavery’

Question 36

how to promote cst

Answer 36

contribute:
- Set and meet targets on Greenhouse gas emissions
- Set and meet targets on women in Exe positions
- Implement our own energy, water conservation, waste plans
- Increase the number of Green Leases
- meet global standards for supply chain
- recycling strategies
meet 6 star ratings for green leases

Question 37

What are the key clauses a property manager agent should include in a commercial lease agreement to ensure legal requirements are well documented
Demise premise

Answer 37

Demise premise
o To be occupied by the tenant
Both parties responsibilities for repairs and maintenance throughout the lease.
A floor plan is generally included.

Use:
Intended use of the premises by the tenant – the prohibited uses will also be listed
Rent
Amount of rent, date of payment, place of payment

Rent reviews:
o May take one of three processes as seen below
o 3 types of rent reviews = market appraisal (market rate), fixed (negotiated into contract e.g. 2% per year), CPI
o Market rent is most ambiguous
o if an agreement cannot be made an independent valuer may come in and value the property to determine the rent

Outgoings:
o rates, tax water
Repairs

Quiet enjoyment:

Default Clauses:
A landlord can terminate the lease
Generally from rent not being paid and/or destruction of the property

Make good:
Tenant must return the asset back to the landlord/owner in the way they received it in.
Currently there is a trend to ask for cash settlements.
This clause is highly important as if unethical or poor reinstatement of the can result in conflict quite easily as a large sum of money is typically involved.

Term

Question 38

Why do large cooperations pay particular attention to CSR?

What are the principles of sustainability and why do they matter

Answer 38

o Good reputation
o Increase employee wellbeing and reduces sick leave and absenteeism by 39%
o Increases worker productivity 7-9%
o Increased efficiency – green buildings use 69% less electricity
o Reduces workplace bullying, global ‘savery’

Question 39

What do Property Managers consider when undertaking
Property assessments
Market assessments
Legal assessments
prior to offering commercial and industrial space to rent

Answer 39

All industrial leases are typically
Long in duration and large annual cost
It is important to ensure the asset fits the needs of the tenant

property assessment:
Location/transport
Category of building/ style etc
- Type of building (Tilt = brick (very solid) Portal = Panels (less structural strength) more beams etc.
- Design, aesthetically pleasing?
- Layout design, offices? Factory?
- Amenities such as toilet facilities, kitchen, break room etc.?
- Building code, which Rating do they achieve and for which classification A,B etc.

market assessment:
Ascertain the current trends
Identify potential/suitable tenants
Examine market for comparable properties to determine rent
The “market rent” is the estimated amount the asset should rent for, between a willing lessor/lessee in an arm’s length transaction.
After the PM examines the market the projected level of demand can be estimated for the current premises.
If there is no demand for property - alterations may be required obtain HBU. (Highest & Best Use)

Legal assessment:
Are there restrictions? Prohibited activities for the site and the area?
Any Legislation affecting the site e.g. zoning & overlays
Is the building is safe for the current/future tenants?
Any restriction? Night use of the facilities / noise restrictions
Any contractual agreements with other tenants?
Special contractual instructions required from the landlord? E.g. Noise reduction technologies may be required by tenant to comply with EPA requirements
Regarding issues you must go to Section 18 (1) Australian Consumer Law

Question 40

What are the principles of sustainability and why do they matter?

Answer 40

Energy Consumption (Natural light, Solar Panels)
Water Consumption (Rainwater tank)
Carbon emissions  (Reduce electricity consumption)
Waste Management (Recycling)
Climate Change (Reduce carbon emission) 
Building Resilience and Adaptation (Prevent natural disaster)
Building Materials and Supply Chain (Certified Timber, Avoid slavery)
Biodiversity and Habitat (Green corridors or landscaping)
Infill Strategy (Brownfield)
Diversity and workplace (Free of harassment & discrimination)

Community standards are changing
Increases employee well-being and reduces sick leave and absenteeism by 39%
Increases worker productivity 7-9%
increased efficiency – green buildings use 69% less electricity!
reduce workplace bullying, global ‘slavery’