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Material Handling Equipment

Warehouse Lease Negotiation Best Practices

Posted by Jimmy Glascock on Apr 26, 2018 8:00:00 AM

warehouse

The right warehouse for your company is similar to a tailored suit: it should make your company look in control and professional, it should fit perfectly, and it should be comfortable and easy to "wear." So what do you do if your current warehouse is ill-fitting?

For most businesses, the answer is either expanding or changing their warehouse altogether. If you're making a change, there are a few important points you'll need to consider first, so you don’t end up in the same situation again soon after.

What Should I Consider When Choosing a Warehouse?

To start your search, you'll need to have a solid grasp of your day-to-day needs. It's especially important to make sure your assessment is current—movement, volume, and expectations within a warehouse can change drastically from year to year. Chances are your needs have changed since you chose your current warehouse: you've likely added SKUs, reconfigured stock, or changed your pick/pack system in the interim.warehouse-exterior

Next, think about where your future will take you. Be realistic, but allow room for optimism: will your business need more space if those plans come to fruition? Whenever possible, a warehouse should have room to grow—the opportunity cost of applying the brakes for another round of warehouse-shopping down the line could cancel out potential gains.

Even if you're not planning on producing more volume, consider the non-cube factors:

  • Where are you in proximity to your largest customers, and where will you be if you land the accounts you're hoping to?
  • Can 3PL services easily reach your location?
  • Do you have the right placement to tap into the local labor pool, or is the commute a bit of a stretch?
  • Does the facility have stable, reliable access to the utilities it needs to operate, or will you be at the mercy of storms or environmental issues cutting you off of the grid in extreme conditions?

 

What Should I Look for When I Find a Warehouse?

If you've found a potential warehouse or two, the time has come to apply another layer of scrutiny.

Make sure you know the age of the facility. While older buildings tend to be more budget-friendly, what you save up front could cost you three times over in the years to come.

Make sure you have an independent third party assess the building before you start moving your merchandise in—they can help you spot and negotiate consideration for hidden damages and "time bomb" issues like outdated plumbing or wiring.

Pay particular attention to the roof—leaks will wreak havoc with safety, stock security, and more—as well as parking lot issues, which could cause damage to truck suspensions or even cause accidents.

Pay Attention to Your Warehouse Lease

If you like the facility and feel confident in your selection, be sure to fully explore all legal aspects of the lease. Spell out in plain terms which party is responsible for which needs, ranging from the repairs above to common maintenance to external facility upkeep and landscaping. It's always a good idea to make lease signing contingent on promised repairs or upgrades being completed: that way, you can move in knowing delays won't slow down your moving momentum.

In net leases, tenants are responsible for repairs. Obviously these are very appealing for building owners, so these tend to be the most common in new warehouse rentals.

contract-negotiationTriple net leases take this concept a step further, requiring the renting party to pay not only maintenance costs but real estate taxes and building insurance as well. The impetus on the warehouse renter to pay these costs is precisely why pre-contract maintenance and repairs are such an important must-have.

A gross lease flips the responsibilities for the three "nets"—maintenance, insurance, and property taxes— back to the landlord or building owner. The renting party is responsible for setup, maintenance, and payment of any utilities they need to operate, but the rent won't fluctuate if operating expenses do. This lease type is becoming harder to find, for obvious reasons. The same applies to a semi-gross lease, which is all but impossible to find—the only financial burden it places on the lucky tenant is responsibility for certain operating expenses.

In general, you'll be hard-pressed to find flat rate anything when it comes to renting a warehouse for your business today. Your best bet for keeping costs stable is a long-term lease, but even that decision should be based heavily on your plans for the future. Those plans will need to be well thought out, as you'll typically be locked into a rental contract for 5 years, 10 years, or even longer to gain those favorable terms.

Hidden Costs To Be Aware of With Warehouse Rentals

Are you really getting the best deal possible? Double-check these potential pain points before you commit and discover them the hard way: through your bottom line.

Real estate tax expense

Under net leases, these costs are typically passed through to tenants. Though the real estate tax structure is fairly stable, if you aren't expecting the charges they can come as a nasty surprise.

In certain states, real estate taxes can be adjusted if a facility changes hands through a sale; if your new lease adds value to the property, the owner may sell at that elevated valuation, sticking you with an unexpectedly higher tax bill.

When in doubt, be sure to check with a local tax or property professional to ensure you're not in the financial crosshairs.

Utility costs in multi-tenant facilities

Much like dividing up the dinner bill at a restaurant, there's a chance you could keep your consumption modest and still end up paying for a particularly "hungry" co-tenant. Be sure to confirm your prorated utility fee reflects your actual usage, rather than paying a neighbor's share out of your profits.

The parking lot condition

There are a lot of "fixes" for less-than-stellar asphalt: repair, patching, and so on. If substructure has deteriorated, however, you could be left holding the bill for a very expensive lot renovation. Take a good, long look at the state of your lot, particularly in high traffic areas, and document if need be.

Insurance premiums

If you deal with sensitive materials or potentially dangerous products, your facility needs to be up to the task of containing them adequately. If certain necessary systems—fire suppression, for example—aren't in place, you could be facing a choice between expensive rush installation or huge insurance increases as a result.

Anything Else I Need to Know About Warehouse Leasing?

Like a movie theater or airplane, make sure the exits are clearly marked on your lease. Know what common scenarios—subleasing, etc.—could trigger a contract breach, and what the financial consequences would be.

No company should ever plan for these to happen, of course, but it's better to be prepared than try to navigate it all mid-crisis should a problem occur.

Remember, if you leave before your contract ends or end up removed for the wrong reasons, you could be on the hook for paying the rest of your lease!

Force majeure should be covered as well—it provides guidance and responsibilities in the event of emergencies like earthquakes, floods, and so on.

Payments and defaults are other points you should make yourself familiar with. Your landlord will have the right to penalize you for a late payment, with penalties ranging from a flat fee to a percentage of your rent, and often interest as well. Make sure any listed charges are reasonable and in-line with practices and expectations within your industry. Issues arise, and you shouldn't be caught financially flat-footed over a lack of planning. That being said, ask your landlord if there's any room for leniency if rent is late, provided it isn't a constant practice.

To Sum It Up

The right third party logistics provider can spare you a lot of headaches when it comes to finding a warehouse. Make sure your 3PL has executed the lease in your name but holds onto the lease as well—you should always retain your rights to assign your lease.

While it can be tricky to negotiate, most landlords are willing to go this route if the renter has a solid credit history. Without a 3PL and the benefits and services they have at their disposal, you may find yourself needing a lawyer to negotiate longer leases, with some contracts reaching into the 50-60 page range. You could end up in an unfavorable lease where the landlord can enter at will to perform disruptive maintenance like repainting, thus sending your workflows deep into inefficient territory.

The Kenco Advantage

While many 3PLs rely on outsourcing to navigate difficult needs like warehouse leases, Kenco maintains an in-house real estate department specifically to handle negotiations and lease agreements for customers. Together with a comprehensive network of large brokers nationwide, we help our customers find, secure, and financially maintain the facilities their company needs to grow.

We know that leasing a warehouse can be a difficult process, but we're prepared to make it feel a lot easier and less nerve-wracking. Take a look at our In Depth Guide to 3PL Pricing and contact us with any questions—we're here to help you be the best you can be for your customers, your industry, and your brand.

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Jimmy Glascock

Written by Jimmy Glascock

President at Kenco JDK Real Estate Group