Five Ways to Increase Savings on Your Distribution Lease.

Employees and executives managing real estate transactions are not just filing leases anymore, and they provide more value than ever.

Companies in a low margin industry, like 3PL, can live and die by their real estate decisions and practices. Subsequently, effective management of pre-and post-lease transactions has become critical to a company’s bottom line.

Technology puts 90% of real estate information in our pocket; it’s getting more accurate and less expensive.

Companies that “get it” are leveraging real estate service providers (brokers) to act as an extension of their RE Department for several reasons.

Efficiency – You don’t have to retrain a broker every time you go to a new market or renegotiate terms when it’s time to renew.

Incentives are in the right place – brokers have a huge incentive to kick ass for you since distribution deals typically have a larger commission payout. Please put your broker to work for you or ask for some of the commission back.

Specialists can anticipate what you want and have many tools and processes in place that can be curtailed to your business. Leveraging their systems will help you avoid reinventing the wheel.

The days of the “good ole boy” real estate agent is giving way to ad-value services and strategic real estate transaction and portfolio management.

Here are five ways to effectively manage and increase your success rate in negotiating lease transactions for distribution space.

1. Turn up the Dial.

Real estate shouldn’t be the “tail wagging the dog,” but it should also not be ignored.

2. Communicate.

Everyone needs to be on the same page, which includes your customer and the local market.

Does your customer expect you to buy/lease/build? What are the expectations?

What is the timing? How soon do you expect to begin receiving product from your customer?

Communicating effectively with the brokerage market is critical to uncovering off-market opportunities and eliminating wasted time on buildings that don’t fit your requirement.

I have a form several of my clients use to confirm that all divisions and relevant parties across the organization understand what will need to be provided in the “ideal space.” This avoids back-stepping in the middle of the deal and creates accountability for all parties involved. Shrugging your shoulders should not be an option.

3. Have a Measurable Process; Trust in the Process.

If you aren’t measuring, you’re not managing. Start simple and stick with your plan so you can look back and adjust accordingly. Email me after reading, and I can send you additional information if you want to learn more.

4. Leverage. Always Leverage.

Do these little things to maximize your leverage in negotiations:

Find at least one other building that meets your requirement, coordinate a proposal and pit the landlords against one another.

Try to avoid direct contact with the landlord until business terms are negotiated. Side stepping your broker makes you look weak and disorganized, plus you have better things to do. Simply schedule a regular update with your broker, and make sure the broker is getting you all the information you need to make well informed decisions.

Ask for more than you expect to get every time (it seems obvious, but harder to practice than it sounds).

In landlord friendly markets, ask for market concessions that allow the landlord to begin cash flowing income sooner than what the competing tenants have proposed (i.e. instead of full months of rent abate half months, burn off security deposit after 12 months, etc.). Also understand who the landlord is and what excites them about leasing the property. You’ll find that single building owners have different motivations than large REITs.

5. Understand Lease Language (non-legal perspective)

“Flex” Space – This is similar to a right of first refusal, except that it is an ongoing right to utilize adjacent vacant space as needed with 15-30 days notice. Basically, it serves as a flexible expansion/contraction agreement with the landlord over and above your base square footage in your distribution space.   Some buildings will not be able to offer this option due to availability, but it should always be proposed.  It can be a quality value-ad for your customers in a pinch, plus you can save yourself a lot a time, money and hassle by negotiating this into your lease upfront as opposed to asking permission after the fact.   A flex clause is ideal for seasonal and peak activity.  It has also allowed clients to take on month-to-month warehousing contracts with customers at a premium rate.   

Holdover – 150% is typical, but push for 125% if you can in conjunction with automatic month to month renewal clause.

Option To Renew – Depending on the market, landlords are typically more open to pre-negotiating renewal rates and concessions before a new lease is signed. Once you sign, they know you will be less likely to back out of the transaction; subsequently, less flexible on terms. Use your broker to negotiate a rate that is in line with market trends.

Landlord/Tenant Obligations – Have a clear understanding of who is responsible for what. (i.e. Does landlord fix roof or do you? If there is a roof leak, what will be the cost and who fixes the roof?; If a forklift backs into a support beam, who does the repair work, and how is it paid for?)

Consider all the scenarios that have caused you trouble in the past and build your standard lease comments around them to save time, money and hassle.

Turnkey vs. TI Allowance – If you expect there to be multiple change orders, you may want to negotiate a turnkey build-out into the deal so you’re not stuck writing a huge check upon completion. An allowance works well for simple projects that involve a low to moderate level of build out; easy to price out.

I recently saved a client over $500,000 in improvement costs by negotiating a turnkey build-out.

Repairs vs. Replacements – Negotiate a cap on repairs and/or replacements every time. Obviously, you want the landlord to pay for all repairs and replacements if you have the leverage to get it, but that’s like finding a unicorn.

In the normal course of business, falling back on a cap for repairs and replacements limits your overall exposure. If you know that the HVAC unit in the building you are about to lease is 10 years old, putting in a cap could easily save you $10,000 or more in replacement costs