The costs of leasing an Industrial Property

The costs of leasing an Industrial Property

Costs of Leasing an Industrial Property

It is very important for a prospective tenant to have a clear understanding of all costs their business will incur before committing to a fixed term lease with a landlord. It is the responsibility of your 5th Avenue Properties broker to advise and guide their client, providing full transparency regarding all expenses, both once off and monthly, allowing for accurate decision making on affordability.

 Rent, and the associated costs, make up a significant portion of an industrial business’s income statement charge. It is therefore critical that all items are well understood.

 Three Main Types of Leases Impacting on the Cost of Leasing an Industrial Property

There are three main lease categories in the commercial market which need to be understood by the tenant. These are a Gross Lease (or Full-Service Lease), Net Lease, and a Modified Gross Lease. The primary difference in these three lease types is who is responsible for the monthly operational costs of the property. Again, it is key that your broker explicitly sets out the type of lease your business is entering into and what this means from an operational cost perspective.

 Overview of Costs of Leasing an Industrial Property

The detail below sets out the leasing costs which need to be assessed by the tenant prior to committing to a long-term lease. In the Industrial property market, most common practise by the bigger landlords is the use of a gross lease. For the purposes of this article, the assumption is a gross lease scenario.

1.        Operating Costs

In addition to the basic rental charge, there are additional costs related to the operation and maintenance of the property, commonly referred to as “op costs”. These operational costs generally include charges for security and general day-to-day maintenance of the property. This amount is calculated by the landlord and included in the quoted gross rate per sqm.

If the facility is in a multi-tenanted industrial park, the ops costs will be charged on a pro-rata per sqm basis.

2.        Utility Costs

Electricity and water are charged to the tenant on a consumption basis and billed in arrears. Unless specified, rates and taxes will not be billed as a separate cost line item to the tenant. Generally, rates and taxes will be accounted for by the landlord in the gross rental rate. If your facility is in a multi-tenanted Industrial Park, the utility costs for common areas will be billed on a pro-rata per sqm basis. 

3.        Annual Rate Escalations

Leases are subject to annual rate escalations and the financial impact needs to be considered when negotiating the lease terms with the landlord. Escalation rates generally range between 6-8% on the gross rental rate. Landlords will often accept lower escalation rates based on a longer lease commitment. 

4.        Tenant Installation Allowance and Beneficial Occupation

The cost of moving to new premises can also be a significant expense which is often underestimated and requires detailed analysis and careful consideration. Moving costs would typically include the expense incurred in moving racking, machinery, refrigeration, and stock. In addition, the moving and installation of the IT infrastructure is of critical importance. 

Landlords should offer a Tenant Installation Allowance or Beneficial Occupation period to assist the tenant with these expenses. However, this is not mandatory and will often be aligned with the terms of the lease (period and size of facility). Your 5th Avenue Properties broker will advise and negotiate these items which could have a significant impact in the final leasing decision. 

5.        Deposit

Landlords generally require a deposit of two times the monthly gross rental. This amount can change depending on the tenant’s credit rating and financial standing. It is important that the deposit be built into the financial projections as it can have a material impact on a company’s cash-flow, particularly smaller companies and those operating on tighter margins.

Certain landlords will hold the deposit in an interest-bearing account upon request allowing for the tenant to earn interest on the money. Alternatively, the landlord may request an irrevocable bank guarantee. 

6.        Parking

Sufficient staff parking is often a major factor for a prospective tenant when deciding on the viability of a property as their new home. In the case of Industrial leases, most often the parking cost is not billed for separately as is the case on a commercial office lease. It is however important that this cost item is explicitly covered in the negotiation and final lease contract. 

7.        Lease Administration Costs

Lease administration costs are often charged by the Landlord or Property Management company. These fees include the costs of drawing up the lease, processing of FICA documentation, vetting of the tenant and conducting credit checks. These costs are considered immaterial in the overall context of the lease but must be disclosed to the tenant. 

Final Consideration

Leasing a new property is a massive strategic and financial commitment which could have a material impact on the long-term sustainability of a company. It is critical that all costs are considered before committing to a lease. An experienced and skilled broker from 5th Avenue Properties will guide and advise you on all related costs and assist in negotiating a fair, market related rental with the landlord.