Top 5 Mistakes Tenants Make When Leasing Industrial Property
Many industrial tenants are hesitant to sign a long-term lease simply because they are unsure of what will be required of them under their lease agreement. There are many terms for industrial tenants to learn, some of which may require the assistance of a real estate attorney or broker. Having an industrial broker by your side can be especially valuable as you tour industrial spaces. Someone who is familiar with the ins and outs of the industrial real estate market will be able to help tenants avoid some of the most common leasing pitfalls.
In this article, we preview the top five mistakes that tenants make when leasing industrial property.
1. Not understanding the difference between a net and gross lease. Most industrial property is leased using either a triple-net “NNN” or gross lease. The difference between the two has major implications for the costs that a tenant will be required to pay.
NNN vs. Gross Lease - The difference between the two has major implications for the costs that a tenant will be required to pay.
NNN industrial leases require the tenant to pay base rent in addition to property taxes, insurance, and all property maintenance. In other words, the tenant is required to cover all operating expenses associated with the property, no matter how large or small. With NNN industrial leases, the quoted base rent is generally lower than it would be on a price per square foot basis than a gross lease given that the tenant will be responsible for all other operating costs.
An industrial gross lease is when the landlord is responsible for paying all property taxes, property insurance and common area maintenance (CAM). Therefore, any time there is an adjustment in the cost of those expenses, the landlord will be responsible for covering those costs. For example, if the town increases its tax rate, any additional costs will fall to the landlord in an industrial gross lease situation.
2. Not asking the owner for a higher “tenant improvement” allowance. As a way of incentivizing someone to sign a lease, many owners will provide a tenant improvement (or “TI”) allowance. This is a predefined dollar amount (often expressed as a $ per square foot) that the tenant can use to improve their physical space. Tenants will often use these funds for things like building out office space, improved lighting, security systems, new loading docks and more.
3. Not knowing what sort of power is needed for a business to operate effectively. Some industrial buildings, particularly older Class B and Class C industrial assets, have limited power. The cost of running new or upgraded utility lines can be costly – both in terms of actual expenses and the amount of time it can take to coordinate with the local utility provider. Knowing a property’s utility capacity is essential for industrial tenants who anticipate having large equipment with significant power needs.
Knowing a property’s utility capacity is essential for industrial tenants who anticipate having large equipment with significant power needs.
Industrial landlords should be prepared to discuss their property’s capacity for both single-phase and three-phase power. Three-phase power runs at a lower voltage so it is more economical (something that is important depending on whom is responsible for utility costs under the industrial lease agreement). Three-phase power can also carry loads of various equipment at the same time. However, depending on an industrial tenant’s line of business, single-phase power may be sufficient for their needs. Industrial owners should also know their property’s voltage capacity. 110V, 208V, and 480V are all common at industrial properties. 110V will run low energy equipment whereas 480V is needed to run high energy equipment. In an industrial gross lease situation, the owner will want to know what the tenant’s need for voltage is prior to signing the lease agreement.
4. Poor loading and/or trucking service. Industrial tenants need to ensure that a building’s loading area supports its needs, both now and as projected into the future. If the loading or trucking area does not meet the business’s needs, these will need to be overhauled and potentially re-engineered – costs that can add up and will fall to either the owner or tenant depending on the lease language. Tenants who don’t have sufficient loading or trucking service may find themselves looking for an alternative industrial facility down the road (which again, comes with a cost!).
Tenants who don’t have sufficient loading or trucking service may find themselves looking for an alternative industrial facility down the road.
There are different loading and trucking configurations for tenants to understand. These include “grade-level” loading where a warehouse door is at street level; and “dock-high” where loading can support semi tractor-trailers backing directly up to the loading doors. Knowing which is best for your industrial business is vital to your company’s long-term success in that location.
5. Not knowing a property’s “clear height”. The final leasing mistake that industrial tenants make is failing to properly assess ceiling clear height requirements. Clear height constitutes the usable space available to tenants for stacking inventory. Gaining even a couple of extra feet of height can mean adding an additional rack for storing items, which allows businesses to shrink their leasable floor area (resulting in cost savings).
What is the property's "Clear Height"?
Although these industrial leasing mistakes are common, they can all be avoided with the guidance of a professional broker. If you’re considering leasing industrial space, contact us today. Our team will gladly walk you through the process of finding, evaluating, and eventually leasing an industrial site that is perfect for your business needs.
About the ComReal Miami Industrial Team: The ComReal Miami Industrial Team has been assisting companies with their South Florida real estate needs for over 30 years. The industrial team specializes in the sales and leasing of industrial properties. Visit Warehouses Market and/or call 786-433-2380 for more information.
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