Words Matter: Terms to Know in Industrial Lease Proposals

By James A. Schnur, CCIM
President and Designated Managing Broker
Integrated Real Estate Solutions
LinkedIn

A key aspect of negotiation is balance. Striking an equitable balance with landlords during lease proposal negotiations is what allows tenants to ensure the lease they’re signing includes the provisions and terms they need to use the space as intended and to continue operating successfully. But leases are structured using highly specific terminology and phrasing that is difficult to parse by those without expertise in real estate. And being unable to fully understand what is written into the lease can put a lion’s share of the power at the negotiating table in the hands of the landlords. 

Fortunately, there are a number of these terms and phrases that tenants can become familiar with ahead of time. There is a litany of terms that come into play depending on specific building types, locations, and industries, but taking the time to become familiar with some of the most common, critical terms used in industrial lease proposals will rebalance the power at the table and provide tenants with a better position to secure their ideal lease.

Base Rate

This is the base amount in rent that is proposed for a space. Most industrial leases have a triple net rental base rental rate structure. This is the minimum “base” amount of rent that is paid to the landlord and is often fixed with annual escalations throughout the lease term.  In addition to the base rate, the tenant is often responsible for other significant additional rental costs such as their portion of the property taxes, common area maintenance, repairs, utilities, janitorial, and building insurance. These costs, depending upon the market and submarket, can add up to be close to or more than the base rent. There are other structures such as modified gross that are just a different way that the tenant pays for the above-mentioned costs. Consulting with a professional real estate advisor will help you sort through these structures and provide you with the real costs of leasing the space. 

Commencement Date

The date that the lease officially begins, and generally the date that tenants begin paying rent for the space, barring any additional concessions or modifications. Tenants will want to ensure that the commencement date provides enough time to schedule and complete necessary site and premises improvements, and if they are relocating, that the commencement date doesn’t overlap with their existing lease.

Corporate Entity

It’s important to be clear about which legal entity is officially renting the space. Many companies operate with multiple holdings under a single corporate structure, but the entity leasing the space should match the financial document provided to the landlord. Being transparent and honest is invaluable for establishing a strong positive relationship with the space’s landlord.

Early Occupancy

This is the period of time prior to the Commencement Date — and prior to the tenant paying rent — when tenants are allowed to begin installing and setting up their equipment, furniture, and fixtures. This is a valuable time for companies and should be included to ensure companies have enough time to bring in the necessary vendors and complete any upgrades or build-out requirements so they are prepared for business to transition smoothly over on, or as near to, the Rent Commencement Date as possible. 

Early Termination Clause

On the opposite end of the spectrum from the Early Occupancy clause, an Early Termination clause outlines the provisions for a company to leave a space prior to the end of the lease. This usually includes a fee for termination, but provides valuable flexibility and security for tenants, particularly when looking at longer leases.

Tenant Improvement Allowance

This is an amount mutually agreed to by the tenant and landlord that the landlord pays to cover the build-out costs to meet the requirements the tenant has for the space, prior to move-in. If a tenant chooses to pay for their own improvements, the tenant can elect to negotiate for a period of free rent and a lower base rent from the landlord as a concession, since the tenant is saving the landlord time, money, and energy in coordinating with architects and contractors for the improvements. 

Use

The use of the building should be particularly precise, as it has a large impact on the environmental and zoning regulations that determine if a building can be allocated for any specific type of work. This includes basics such as industry, production processes, equipment used on site, number of employees, hours of operations, and even more granular details such as the required number of parking spaces, specific details on material and waste handling, noise levels, and even odors produced. Tenants need to be careful, as any misrepresentation of the use of a building or space can come back around with severe consequences in the forms of fines and even the local municipality shutting the business operations down.

As mentioned, sorting through the specificities in lease terms requires expert-level knowledge to ensure that tenants are receiving the best terms possible for their space. This is why choosing to work with a commercial tenant representative broker is so important. Partnering with a professional team like those at Integrated Real Estate Solutions — with knowledge of the terminology, real estate landscape, and your specific business needs — provides companies with a valuable asset and a much more balanced presence at the negotiation table. Additionally, a commercial tenant representative broker is available after the ink is dry on the lease, helping resolve tricky landlord disputes and building challenges, with the support to ensure you are protected based on what you negotiated.

No matter where you are in your relocation process, consider consulting with the professionals at Integrated Real Estate Solutions. The commercial tenant representative brokers of IRES proactively look at commercial real estate opportunities and solutions that make sense on all levels for our user clients. Leverage our experience and expertise by talking to us about your plans and vision.

Integrated Real Estate Solutions, Inc. provides clients with the in-depth knowledge and experience that is critical to determine the right path to your next move, lease renewal, or strategic re-positioning of your real estate portfolio. Contact us or call 847.550.0160 today about your needs, and put our success to work for you.

Author: Jim Schnur

Jim Schnur is the President and Designated Managing Broker of Integrated Real Estate Solutions, Inc. Jim started the firm in 2003 after almost 20 years negotiating and overseeing real estate transactions at Hewlett Packard Co. and Agilent Technologies, Inc.

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