Turning Your Leased Industrial Facilities into a Profit Center
By George Livingston and Christie Alexander of NAI
According to current economic indicators–and most economists–U.S. business and industry will likely show measurable signs of improvement in 2011. That means the window is narrowing on the opportunity for industrial firms to recognize significantly improved revenue from their leased facilities.
That may seem counter-intuitive at first. But the current economic cycle is rife with opportunity for successful enterprises with positive credit history. Your landlord is loath to admit it, but the fact is, your company–more specifically your leasehold obligation–is one of your landlord’s principal assets right now.
Nationwide, commercial properties–including the facilities you occupy now–have decreased in value as a result of the real estate decline and the accompanying recession. With regional and local market vagaries, all properties have suffered. As undercapitalized companies downsized or folded, vacancies spiked and rents from remaining tenants have not made up the difference.
That means the capital value of your monthly rent payment–the relative proportion of your landlord’s mortgage payment or ROI covered by your payment–is substantially greater than the numerical dollar value. Your landlord and your landlord’s lender are both eminently aware of this.
To the extent that you can turn that value differential into cash–or concessions–you can improve your company’s cash position.
But beware the window is closing. As the economy improves and more companies expand, the value differential will evaporate.
If your lease is due for renewal this year, current market conditions are even more favorable. Landlords will agree to substantial concessions to retain a good tenant. Even if your lease is not due for renewal soon, negotiate now and offer to extend the term.
A reputable offer of terms and conditions from a new landlord will inevitably lead to stronger concessions from your current landlord.
From your current landlord’s perspective, the only meaningful differential is an estimate of your relocation costs versus his cost to lease the space to a new tenant.
Well-informed–and well-represented–tenants are cutting very good deals now with pragmatic landlords, fixing advantageous rates, lengthening lease terms and negotiating improvements and upgrades.
In the current market cycle, most companies will benefit from lease negotiations conducted with the expertise of a good tenant representative. Almost every commercial property firm today retains associates whose specialty is representing the interests of tenants.
Such specialists have the capacity to research properties, landlords and local market conditions, and know which concessions are most reasonable.
They also know the conditions landlords face. A newly built industrial property may have minimum lease requirements imposed by lenders, and thus might be more flexible granting improvements or upgrades than lower lease rates.
Landlords of older properties may be in a better position to wait out the recovery and thus be less inclined to negotiate generous concessions of any sort. A good tenant representative will know the inside story.
The end result is the same. Time is of the essence. Act now and you can lock in rates and terms that fit your business plan and substantially improve your bottom line.
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NAI Keystone is a full service commercial and industrial real estate firm located in Reading PA; representing buyer, tenant, and landlord representation throughout Pennsylvania.