When Covid-19 was declared a global pandemic, this implied that things were about to take a turn for the worst. True to this, the pandemic began taking a toll on every industry and gradually destabilised the economy worldwide. Unfortunately, some sectors entirely collapsed while the rest were left shaken and disoriented, with the need to make adjustments for them to survive.One of the industries that have been greatly hit is real estate, especially on the bit regarding commercial leases. Keep in mind that commercial leases can only thrive when businesses that are renting property are excelling, for the sustenance of the lease agreement. With some corporations completely shutting down, this is a potential disaster for the commercial property sector.
What is Commercial Tenancy?
This refers to the occupancy of commercial property possessed by a landlord. This occupancy is by an individual or by a business entity that is in the capacity of a tenant. The occupant is obligated to make regular payments, for use of the commercial property.
This kind of arrangement is regulated by a formal written agreement whereby both parties must adhere to the set guidelines. It is also important to note that commercial property is only rented for business purposes and not other uses such as a residence.
Kinds of commercial leases
There are five major types of commercial leases, as listed below:
- Percentage – Rent to be paid is a percentage of the sales or profit generated by the business entity.
- Wholly-serviced – The rent paid by the tenant is inclusive of services that are normally catered for separately.
- Net – Tenants pay the entire percentage of insurance, maintenance charges, and taxes.
- Double net – rent, insurance, and taxes are paid by the tenant.
- Triple net – All costs, as well as rent, are incurred by the property tenant.
Requirements to Meet as a Commercial Tenant During the Covid-19 Pandemic
Even though the following requirements still needed to be observed before the pandemic, more emphasis is now being put. This extra emphasis is due to the changing times and uncertainties on what the future holds regarding the economic environment.
1. Good and stable financial income
Businesses’ sales have gone down, therefore reducing the amount of revenue generated. In turn, this effect has a negative impact on the entities’ ability to meet their rental obligations. Unfortunately, some commercial tenants have run out of business and ended up being kicked out of the property that they have been occupying.
2. Proper business plan
A business needs a plan for it to be successful. Such a layout incorporates making projections of how the future will be like and the actions that should be taken for the business to remain viable and profitable. Coronavirus has caused so many uncertainties that it is now very hard for entities to make business plans that are in line with the constantly changing market environment.
3. Excellent performance in the past
If the period forming the basis of review is the time when the pandemic hit, it is likely to assume that most businesses have had poor performance. Therefore, for an entity that is now seeking commercial property to occupy, the landlord might not offer them any space. Especially in recent months, most firms have performed so badly that this performance may hinder them from getting a commercial space to occupy.
Impact of Corona Virus on the Yield of Commercial Premises
1. Less profitable terms
Due to financial constraints faced, tenants are now settling on terms that will have a financial impact on them. Even though such terms mean that they have to compromise on other elements, it still eases their financial burden. Consequently, owners of such commercial property realise less revenue and reduced profits.
2. Fluctuating interest rates
Interest rates are a determinant of the cost of commercial property and have an influence on the rent that should be paid. When the interest rates are too high, this works to the disadvantage of the commercial tenant. High rates translate to higher financial obligations.
3. Unstable economic environment
When the economy is unsteady, fewer investments are made, and also, there is a tendency to spend less too. Fewer people or firms are interested in investing in the commercial property industry. Also, commercial tenants are no longer comfortable spending money or any other resources on making rental payments.
In addition to this, it is of the essence for a commercial tenant to be mindful of some elements, while leasing property during the pandemic. During the coronavirus pandemic, tenants should have an understanding of the right time and way to end lease agreements and the mode in which costs like insurance and taxes should be catered for.