Before You Sign an Industrial Lease

Be aware of market conditions.  Buy low, sell high.  A tenant should be aware of the business cycles of real estate before deciding to lease industrial space.  If vacancies are high, tenants can secure better deals than when vacancies are low.

Ensure flexibility.  Most tenants’ needs change over the term of the lease.  All leases today should contain options that give the tenant flexibility, including the option to expand, option to renew, option to terminate and/or option to sublease the space.  Simple advice: Think about your future needs and contingencies before signing a lease today.

Protect your right to be a tenant.  In today’s economic times, the landlord’s obligation to the tenant can be jeopardized by his non-fulfillment of obligations to his mortgage holder.  A properly drafted non-disturbance clause will guarantee the tenant’s right to occupy the space regardless of any misfortune of the current landlord.

Provide for disputes.  During the term of any lease, management, as well as ownership, can change.  The landlord with whom you signed the lease today may not be around tomorrow to honor unwritten promises.  If a dispute arises, the most efficient and fair way to come to a resolution is through binding arbitration by a panel of experts.  Have your attorney review any arbitration clauses carefully.

Understand the transaction.  Never sign a lease until you understand all the costs associated with occupancy.  In “triple net” leases, a tenant can pay for such things as changes to landscaping or adding a manager to the property and paying that manager's salary.  Every tenant should ask for the total costs associated with occupancy to be explained in simple language.

Examine building floor plans.  Different floor plans have different layout efficiency.  One building’s floor plan may require more space to achieve an efficient plan than another building’s.  Have preliminary plans drawn to determine just how much space you need in each building before you make any decisions.

Scrutinize your construction allowance.  Every lease should contain a “work letter” describing the improvements to prepare the space for the tenant’s occupancy.  This work letter should be based on drawings that are completed prior to lease execution.  It should include a detailed description of the quantities and quality of materials to be used in the construction.  When changes are made to the floor plans, costs should be adjusted and credits received when appropriate.

Understand operating expenses.  In every industrial lease, there is a clause that typically provides for the tenant to pay increases above a starting amount of building operating expenses.  Operating expenses typically include such things as taxes, insurance, and utility costs.  This is a sophisticated and complex aspect of a lease transaction that has significant cost implications.  Get a detailed explanation of operating expenses by the landlord and your broker prior to lease execution.

Final advice.  These suggestions are by no means a complete list of considerations when signing an industrial lease; however, they do deal with some of the most significant ones.  An experienced tenant representation broker can help you with all these issues and make your lease transaction a much more satisfying and beneficial experience.