It is crucial to find the right balance when negotiating industrial lease proposals. You need to achieve terms that meet your company's needs while being pragmatic with current market dynamics. Industrial properties are in high demand due to the rapid growth of eCommerce and the subsequent acceleration of the pandemic. Tenants cannot expect concessions like four to five months of rent-free or generous tenant improvements allowances. This is a market for landlords and will likely continue to be so in the future.

Tenants can make the situation more level. Understanding the terms and conditions that should be included in your industrial lease proposal will allow you to secure the ideal space or property for your company and ensure your continued success.

Important Industrial Lease Terms

It is best to keep your lease proposal as straightforward as possible while still covering all relevant elements to your company. The following are the most important terms to be included in any industrial tenant's lease proposal:

• Premises.

• Corporate entity.

• Use.

• Commencement date.

• Early occupancy.

• Rent is free

• Base Rate -- Type, amount, and annual escalations.

• Tenant improvement allowance

• Security deposit

• Broker commission

Premises:

 This refers to the area in question. Although it may seem obvious that you must clearly identify the space you want to lease, many people overlook small details that can lead to confusion. If applicable, include the complete property address, including the city, state, and zip code.

Next, multiply the estimated square footage of the space. Keep in mind that commercial space measurements are approximate. The estimate in your lease will still be used to calculate your monthly or annual rent payments. Tenants will often try to reduce the size of the premises by negotiating it. However, 95% of the time, this tactic fails, and I advise my clients not to do so. Instead, you or your broker may need to refer to the Building Owners and Managers Association's published guide industrial property measurements.

Corporate Entity:

It is crucial to clearly identify the corporate entity to be attached to lease documentation. First, the entity must be identical to the financials provided to the landlord to review the lease and securitize it. Second, larger companies may have multiple legal entities under their corporate umbrella. Finally, the landlord will need to know which entity is renting the space, and its relationship to the corporate office.

Use:

It is vital that industrial leases contain a use clause, mainly because of the stricter environmental and zoning regulations in areas close to major population centers. A standard industrial use clause would have identified an automotive parts factory as being used to "manufacture and distribute automobile products." However, today's landlords want more detail. They want to know the details of the production process in the space, how many people will use it, how many parking spaces they have; the hours of operation; the equipment and materials used; how these items are handled; and the expected noise levels and smells from exhaust.

Commencement Day:

The date that the lease will start is called the commencement date. This is the date you start paying rent for the space, if there is no free rent. It would help if you worked with your landlord to agree on a date. It is best to avoid any commencement dates that overlap with your current lease to avoid double rent. However, you shouldn't cut corners either. If your current lease expires one day and your new lease begins the next, this creates undue pressure to move quickly and seamlessly.

Early Occupancy:

The term "early occupancy" refers to the time you are allowed to install your FF&E (furniture fixtures and equipment), but not responsible for paying rent. This is a crucial step to ensure a smooth transition. Unfortunately, many people don't remember to include it in their proposals. You can negotiate an early occupancy date and push back the start date. This will allow you to have your electrician, contractors and material handling vendors inspect the space. Also, this allows you to begin phasing in your move-in to minimize disruption.

Rent Free:

It is precisely what it sounds like. You can occupy the space for a certain period, but you do not have to pay rent. The amount of free rent you can secure will depend on the local market dynamics and your company's credit, use, and requirements. Most industrial tenants will receive between one and two months of rent-free.

Base Rate - Amount, Type, and Annual Escalations:

The type of lease you are seeking will be included in your proposal. This could include gross, modified gross, or triple net rent. You will also need to describe the annual escalations (increases or common-area maintenance fees) that you are proposing.

Tenant Improvement Allowance:

To determine the right tenant improvement allowance you should request from your landlord, you need first to create a list of your requirements for your space. Then, communicate your needs to your architect. An architect will help you determine if the landlord should pay a flat fee or if it should be a dollar per square foot. You can also provide the same priorities to your landlord if you don't have one. The landlord will work with their contractor and architect to create a budget estimate. Ask for rent free of charge if you are able to and want to make your tenant improvements. This will save the landlord money on the cost of the improvements as well as the time and effort required to coordinate with the contractor and architect. This will help the landlord to take a less burden.

Security Deposit:

You can calculate how much you believe your security deposit should cost and then propose a fair amount. Large corporations may be able to forgo a security deposit based on their credit history. However, a standard amount of one month security is required for about 80% of industrial leases. This applies to all sizes. Your credit score, the number of tenant improvements allowance you wish the landlord to pay, and the length of your proposed lease term are the main factors that determine the size of your security deposit.

Broker Commission:

The expected costs of broker commissions for landlords are called broker commissions. To avoid miscommunication, the arrangement and the amount of commission should be clearly stated in the proposal.

Other Industrial Lease Terms to Consider

If the situation permits, or if you have specific concerns, you can include or add detail to any or all of these clauses to enhance your industrial leasing proposal.

• Background of the company.

• Parking.

• Trailer parking.

• Fenced yard.

• Financials.

• Condition.

• Lease audit rights

• Environmental Indemnity.

• Warranty.

• Surrender.

Company Background:

You can give the landlord more information, such as your business history, growth projections, product lines, rental rates, and current property. This will help them to understand your company and see the benefits of your tenancy. In addition, this will allow them to be more open to your requests -- from the desired tenant improvement allowance to the number you need for parking spaces.

Parking:

It's also important to think about how many parking spaces your company will require for visitors and employees, now and in the future. You can determine if spaces are available for rent, and if you should demarcate which spaces belong to your company.

Trailer Parking:

You need to ensure that you have sufficient trailer stalls if you work in third-party logistics or another industry with a significant logistics component. You can also get into your loading docks when your trailers are empty finally, that your containers are secure and safe during and after business hours.

Fenced Yard:

It is important to make sure your company's tractor and trailer are safe. You should also consider whether you need a fully fenced yard or if it is feasible to share a truck court. If fencing is not feasible or desired, it may be possible to negotiate.

Financials:

Leasing industrial space is similar to applying for a mortgage. Be organized. Which company will get better terms? The company that presents its financials quickly and in an organized package or the one that waits two weeks for their CPA from vacation to return from vacation, whose tax returns are on extension, whose books are not complete, and who has a current P&L from the previous year?

Condition:

You may assume that all the essential structural features and amenities will be present in the building and be in good condition. Unfortunately, it is not always true. It is worth noting areas that need attention. This will ensure that your tenant improvements allowance is not used to repair items that are the landlords responsibility. It will also guarantee that the landlord does not neglect to make necessary repairs before you move in.

Lease Audit Rights:

Every spring, you will receive a common area reconciling bill that bills for the difference between actual and estimated operating expenses. In addition, you might consider negotiating for audit rights to ensure that expenses are accurate and fair.

Environmental Indemnity:

You should investigate any environmental concerns that may be present. To address any environmental problems at your property, you should take the following steps:

• You must ensure that your team is safe when you take possession of the property.

• You must ensure that you are informed about any ongoing cleanups that could affect your occupancy or use of the property.

• Examine all documentation and, most importantly, the test results for your property.

• You can negotiate an indemnity to ensure that you are not held responsible for any landlord's environmental liabilities.

Warranty:

It is important to look at the building systems in the property. Ask for a warranty for the HVAC system, and all other operating systems for the property, for approximately 30 days to 6 months. Many novice tenants will settle for no warranty period. Sometimes, smart tenants are able to secure one-year warranties. In less competitive markets, the systems can even be warrantied for the entirety of the lease.

Surrender:

The surrender clause is last, but not least. The surrender clause is the agreement that outlines the conditions under which you will return the property to the landlord at termination of the lease. For example, you should be clear about what you will do to remove any HVAC units, racking or electrical conduit at the end. This upfront clarification can help you save hundreds of thousands of dollars at lease termination.