Overview of Industrial Leases
Leasing industrial space can seem very complicated. There are a lot of things to consider, but reviewing the main points in advance can help. Here, we will try to hit the main points. But, as always, you can simplify your life by using an industrial broker to guide you through the process (and help negotiate – see the next section).
A. Credit requirements: Landlords of industrial spaces are generally no-nonsense business people, and expect their tenants to be professional business people too. In order to make a decent deal with you, they want to see that your business has been around a while, that you can pay the rent, and that you’ll have something to lose if you don’t pay the rent. So they’ll check your business credit. If that isn’t sufficient, then they’ll want to check you out personally, maybe with a guaranty.
B. Personal Guaranty: Weather your business is good or not, some landlords require you to personally guaranty the lease. That basically means that you will be responsible for the rental even if your business goes bankrupt (of course, if you personally go bankrupt all bets are off). Depending on your business structure, this isn’t necessarily a big deal. If you’re confident about your business and you’re not biting off more than you can chew, then there’s no problem. With good negotiation, the tenant can sometimes limit their personal exposure by capping their guaranty (i.e. to just the first year).
C. Lease Types:
1. Modified Gross Lease: This is one of most common leases. In this case the quoted rate includes property tax and building insurance. If there is an increase in the tax or insurance in future years, the tenant is responsible for their share of the increase. An additional charge called CAM (Common Area Maintenance) is often charged to cover landscaping, roof repair, exterior building maintenance, etc. An example is 10,000 sqft at $5.00 MG plus $0.45 CAM. This equates to 10,000x($5.00+$0.45)/12 = $4,541.67 per month total charge.
2. Triple Net (NNN): This is also common, where the quoted rate is net of taxes, insurance, and CAM. Whenever the tax, insurance, and CAM charges increase, they are passed on to the tenant. So a space might be quoted as $5.00 plus expenses of $0.35 tax, $0.08 insurance, and $0.30 CAM. The total monthly charge comes out to 10,000x(5+0.35+0.08+0.30) = $4,775/month.
3. Gross: In some cases, the small landlord may just quote a lease rate as $1500 per month, with no strings attached.
D. Lease Term: Typical Atlanta industrial leases are for 3 to 5 years. Tenants will usually get their best deal by negotiating on a 5-year lease. The landlord is willing to put up free rent and spend money on the space knowing that they will see a return over a decent amount of time. Some companies are willing to go even longer (7 or 10 years), but this is less common.
We are seeing more short-term (1 or 2 years) leases than ever before. With vacancies on the rise, landlords are getting more creative. Effectively the same is a 3-5 year lease with an option to terminate after 1 or 2 years. However, don’t expect free rent or landlord improvements on these, because they don’t get their investment back.
E. Free Rent: This really depends on the deal. But recent leases have all included 1 free month of base rent (see the glossary) for every year of the lease term, but added to the end of the term. For example, on a 5-year (60 month) lease tenants are getting 5 free months of base rent, but the term is increased to 65 months. These free months may be given together at the beginning of the lease, or spread out over different years.
F. Tenant Improvement Allowance (TI): Some landlords have a certain amount of money for tenant remodeling factored in to the quoted rate (i.e. $3/sqft). These are usually larger landlords, with deep pockets. Small owners don’t have the cash for this, but may negotiate a better rate with the tenant paying for their own improvements. In the recent economy, all landlords are hurting for cash. So tenants get the very best deal when they take spaces in “as-is condition”, or only asking for paint and carpet.
G. Tenant Repairs: A lot of tenants don’t realize that they are exposed to very costly repairs to HVAC systems, and sometimes roofs and other costs tied into CAM charges. A broker can help you negotiate a cap to these costs (i.e. no more than $1000 per year to repair air conditioning; CAM will increase no more than 4% per year).
H. Rental Escalations: Since inflation is ongoing, landlords increase base rents annually. A common escalation is 3% per year. With current concerns about higher inflation, some put in language tying the increase to the government’s CPI (Consumer Price Index) in case we see hyperinflation.
Marc Glaser
Direct 404-542-1585
Fax 404-935-0649
mglaser@topcommercialbroker.com
