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Understanding industrial leasing.

Space costs are an important element in operating any plant or warehouse. Normally the costs of the facility are the largest expense in this category. With increasing emphasis on outsourcing, however, many companies no longer own their own real estate. Instead, they prefer to lease property. Thus, it's important that materials handling professionals have a basic understanding of leasing.

Industrial real estate leases generally come in two common forms; gross leases and (triple) net leases. In a gross lease the landlord or building owner has the responsibility for all building costs including maintenance of the property. This relationship is like rental of an apartment, with the tenant only responsible for providing furniture and (at his or her option) insurance covering contents.

At the other extreme is the triple net lease in which the tenant is responsible for all costs including building upkeep. In other words, if there is a problem with a roof leak at the building, it is the tenant's responsibility and cost to fix the leaking.

Most industrial leases fall somewhere between these two extremes. It's important to determine the responsibilities of each party as part of the leasing negotiation. If you have a smaller warehouse located in an industrial mall, for example, many of the costs of maintaining the common elements-such as landscaping and snow removal-are charged back to the tenant by the landlord.

In lease negotiations it is often possible to have the landlord pay for part of any building improvement costs; these costs then are amortized over the lease term. In soft real estate markets the landlords may provide such inducements to rent the space, particularly if they add value to the building.

When negotiating, it's important to understand the legal difference between improvements classified as "chattels" and those as "fixtures." Fixtures are attached to the building and automatically become the property of the landlord at the end of the lease unless specifically exempted. Chattels, on the other hand, are the property of the tenant and can be relocated by the tenant.

Different types of materials handling equipment are classified as one or the other under these rules. Loading dock equipment such as levelers is often classified as fixtures. Racking, even if lagged to the floor, is usually classified as a chattel, but it may be in a gray area in some leases. If in doubt, make certain that a piece of equipment is specifically mentioned in the lease as a chattel.

Land costs, leased building expenses

Here's a way to understand how the building owner sets the lease rate. Most warehouses are sited in an industrially zoned area that qualifies only for about 50% building coverage. Or, roughly speaking, on an acre of land covering nearly 44,000 sq ft, there is gross space for up to 22,000 sq ft of building area.

Assume this acre of land costs $440,000. In terms of cost per square foot of building space, the land cost component is $20 per sq ft ($20/sq ft X 22,000 sq ft = $440,000). Adding in a construction cost of $40 per sq ft to build the facility results in a total facility cost of $60 per sq ft.

Long-term investors financing this property, in a stable real estate market, will require a certain rate of return, or "cap rate," for their investment. Assume the cap rate is 9.5%. Dividing total facility cost per square foot by the cap rate gives the approximate (triple net) lease rate. In our example, $60 per sq ft divided by 9.5 = $6.31 per square foot.
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Author:Luton, David
Publication:Modern Materials Handling
Article Type:Statistical Data Included
Geographic Code:1USA
Date:Aug 31, 1999
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