“Over the last few decades, the real estate industry has become segmented. Working with a broker who specializes both in product type and geographically will save you money in the long run,” says John C. Dunphy, CCIM, SIOR, managing director, industrial services, Colliers Arnold.
Dunphy cautions that you need a comprehensive plan up front. “Not doing your homework and failing to keep an eye on the tenant-improvement side of the equation will drive up your lease rates.”
Smart Business asked Dunphy for tips on negotiating rates when tenant improvements are required.
What are some common misconceptions prior to entering into an industrial lease?
Many tenants believe that if they focus primarily on obtaining a low rate per square foot they will get a good deal. That’s not necessarily true. You have to consider the functionality of the space and the build-outs that will be required. A 10,000-square-foot space that is laid out effectively, fits your specific needs and requires few build-outs might end up being a better deal than a 12,000-square-foot space that is priced lower per square foot but that will require more build-outs.
How does one go about identifying the right space at the right price?
Working with a specialist will provide a tremendous advantage. This person will know all the nuances of the lease language, legalities and tax implications.
Working with a generalist can cost you a lot of extra money. A generalist may not have access to all the listings that a specialist does. The specialist is always networking. He knows what is coming and going whose lease is expiring when, what properties are coming up. The specialist also keeps things moving along quickly. He can usually identify suitable options for you within one or two phone calls.
Importantly, the specialist knows how to prepare a comprehensive RFP, rather than go to a landlord piecemeal. Many deals slow down because of piecemeal. Landlords want everything thought out, all at once. Huge time consumption can kill a deal. Our industrial market is fairly tight (about 5 percent vacancy rate). If the tenant is not prepared to come out of the box with a well-thought-out plan, the space will be leased out right from underneath them.
How far in advance of a lease expiration date should a tenant start thinking about moving?
Tenants beware. Florida statute allows landlords to increase your rent up to 200 percent per month if you go into holdover.
Smaller companies should start talking to a broker about six months before their lease expires. Larger companies need more time, probably around nine months. This will enable them to take advantage of possible opportunities with newly constructed buildings or other factors that could be in their favor.
Generally speaking, it can take 30 days to look at space and begin the initial stages of the RFP, 30 days to negotiate a deal and get the first draft of a lease and 30 days to review. So we’re already at 90 days if all goes well. Then you have to allow 30 to 60 days for permits on improvements, 30 to 90 days if build-outs are required … so the process takes many months.
If improvements or changes are required, how do you negotiate who pays for what?
You can have the landlord do the improvements or you can arrange to hire your own general contractor.
Many landlords prefer to make the improvements themselves so they can control what goes into the building. To provide this service, most landlords will build in oversight fees, usually from 4 percent to 6 percent. If the tenant goes this route, he needs to be clear on what will be included in the build-outs and for what fee.
Tenants should be aware that some landlords also own their own construction firms, which they operate as a profit center, to make improvements in the buildings they own. If this is the case, the tenant should ensure the prices are in line with what he could find for equivalent services elsewhere.
The tenant may be able to save money by hiring his own general contractor and reviewing the bids himself. This will not only reduce some of the fees but also speed the process. In some cases, the owner may be willing to offer a discount if the tenant takes this path.
On another note, there may be tax benefits to both the landlord and tenant if the landlord provides the funds for the tenant to make the improvements; for example, in the form of an improvement allowance such as six months’ free rent. These are among the many options a well-versed broker can help you explore.
JOHN C. DUNPHY, CCIM, SIOR, is managing director, industrial services, Colliers Arnold. Reach him at (727) 442-7184 or firstname.lastname@example.org.