Industrial Leases: What to Watch out For

Commercial Real Estate Investing From A-Z

What are some major items you should keep in mind when negotiating and reviewing an industrial lease? What are some potential major pitfalls? Chad Griffiths a commercial real estate broker and industrial investor will share his knowledge with us.

You can read this entire episode here: bit.ly/3e0P84Y

Let's review things people should keep in mind regarding industrial leases.

A lease is going to spell out who the tenant is, who the landlord is, who the parties are, the size of the space, when it commences, how long of a lease term it is, what the lease rate is going to be, and that can be a fixed rate for the duration of the lease, or it can be a lease that has predetermined escalations in it. Let's use a quick 10-year lease as an example, it might start at $10 a square foot and go to $15 a square foot by the end of the term. What we're actually seeing is quite common right now is a rent increase tied to some percentage, so it could be tied to CPI, or it can just be a percentage that's put in. I just did a lease late last week. It started at $8.50 a square foot and had two and a half percent yearly escalations for a five-year term. We're starting to see that that is pretty common as well.

Once you start getting beyond the obvious terms of what's in the lease, who the parties are, how long it's going to go for, what the rent is, then you're going to start getting into provisions that deal with the operating costs. For those needing a quick refresher on it, the majority of leases are going to be structured, I should preface that there are NNN leases. You'll have one lease, it'll say that this is the base amount that they pay, then the tenants also pay for their proportionate share of all the operating level expenses of the building. That's property taxes, building insurance, commentary, maintenance, management fees, and that's always going to be an estimate. The landlord will give the tenant an estimate on what it's going to be in advance. After the year ends and all the bills come in, they either give the tenant a credit, if they charged too much, or they invoice them if there was not enough paid throughout the course of the year. That language is probably the most important thing as a property owner myself, you want to have it very clear that any increases in those expenses can get passed through to the tenant. If that language is vague, and it becomes contentious, it might not be a big deal if it's a small lease like a 5,000 square foot lease, and those discrepancies, but you can imagine when some of these big distribution centers are approaching a million square feet, if there's a small discrepancy between how the landlord expected it to be and what the tenant interpreted it at, that can be 10s, hundreds of 1,000s, if not millions of dollars.

Make sure that you understand all the little details, even insurance could be another one that becomes contentious, it varies market to market, but in my market it was common that tenants had to have $2 million worth of insurance. And now almost every landlord has increased that to $5 million of insurance, and there'll be markets where I'm sure it's even higher where prices are higher. But just making sure that that insurance provision is correct, involving your insurance agent, but at least it should be viewed as a document where a number of people have input into it, and the accountant might want to have input into how some of these costs are handled, your lawyer definitely needs to be involved in it, insurance broker is another one.

Chad Griffiths

www.youtube.com/c/ChadGriffithsCRE

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