Commercial tenant led development of >1000m2

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When seeking property developments, most think sites first before outcome. There’s another way though, particularly in commercial and that’s tenant first, property second.

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Commercial property is valued on a yield of its net income. While there are exceptions, primarily, it’s all about the cash return to the investor. Very simply, if a property rents for $10,000 a year and the current market yield is 10% then the property is worth $100,000. Should the rent drop to say $8,000 p/a, the property is now worth $80,000.

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Return matters, rent matters and that’s why very early on in my commercial property career I was told ‘tenants are God!’. (need more detail on yield and factors maybe a download sheet here). Operating in an expanding region with a growing population and market, its common for tenants to require premises that don’t exist or have all been leased.

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These circumstances plus specific tenant briefs often mean - when a tenant says ‘we want a building X m2 large with ceilings Y metres high with exposure’ then once the existing options are explored, it’s time to find a suitable vacant site and pursue a purpose-built building.

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The project was created on such a premise. I was approached by two tenants separately, Ian Diffens World of Tyres (now owned by Bridgestone) and Ultra Tune looking for new Maroochydore premises. Their briefs were quite specific and so I looked for a site for each to accommodate their needs. Using my extensive development experience and the fact that I did tech drawing at school, I felt experienced in building creations.

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I located a site occupied by an old former cinema building made almost entirely from asbestos, and most recently, occupied by Mad Barry’s Home Improvements. Now that it was vacant, I approached the owner about selling, gaining in principle approval for the site’s location from the tenants. I sketched the proposed outcome, very badly I might add and presented it to a builder to purchase the site and deliver the building.

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From there a back and forth on outcome, costs, rents and timing ensued before we reached two signed 10-year lease terms from the tenants and with excesses land on the site we also added 2 additional tenancies to be filled which I’ll cover later. Knowing the builder wanted to sell the building on completion I offered the tenancies on a strata titled basis too= two investors looking for a new property.

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Over the years we did this successfully, sometimes in multiple locations for many national brand names such as; Mc Donald’s, Brambles, Bridgestone, Commonwealth Bank, Supercheap Auto, Subway, Dominos, 7 Eleven, Night Owl, IGA, numerous cafes and food uses plus many others.

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As a commercial consultant I also learned that more time-consuming projects like this were very satisfying, as we created buildings and many jobs both during and after construction. It also meant we got paid up to four times on the one job being; selling the development site, pre-leasing the spaces to the tenants, selling the end product often as investments and finally managing those buildings for the new owners. As such, I specialised in these design and construct or tenant lead developments and became very popular amongst builders and along the way learned the development process.

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Pre-leasing and selling such a large amount of the development hedged the risk. The addition of the two extra tenancies to maximise the site’s potential within the local authority planning constraints made sense on plan and in the financial feasibility. BUT it also served as a valuable lesson I have since called The Beach Road rule.

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The site was deeper than its frontage and so the two pre-leasing tenancies got all the main road frontage and the additional tenancies were added in behind and hence less desirable. So, they sat for a long time before both being eventually sold almost 12 months later for less than estimated. The project was still profitable earning about 18% on total project costs versus the 25% forecast, though I subsequently worked out that had we just built the two pre-leased tenancies only and underdeveloped the site thus completing the project 12 months sooner we would have earned a 15% with significantly less time and fuss, freeing up the capital and our minds much sooner. So, The Beach Road rule is less can be more, you don’t always have to fully develop the site to its maximum, be considered in design and outcome.