The Warehouse Lease – Don’t Just Sign it and Forget it
Real estate is the second highest cost in a logistics warehouse operation. It can represent from 20 to 35 per cent of the total cost of running that facility. For managers who have financial and line responsibilities for a logistics operation, legal and financial implications are often misunderstood.
This article will help to clarify those issues and suggest ways to manage mounting costs, using the following example as a guide.
You have just moved into your company’s new leased 100,000 square foot logistics centre, complete with new racking systems and material handling equipment to fulfill your customer orders in a more cost- effective way.
This all sounds positive and promising, but you do have a large financial commitment, based on a five- year term. Including net rent, taxes, maintenance and insurance and utilities, gross rent for the five years is $4.3 million – a sizable chunk of your operating budget.
Leasing costs – financial scenarios to consider
So how do you manage these costs? And what can have a negative impact on forecasted costs?
You need to start with the lease document – a lengthy legal contract that spells out all the costs, terms, and rights between the tenant and landlord. Your real estate broker can provide a lease abstract, which highlights the key information.
So what can go wrong? Here are a few scenarios that we have seen on many occasions.
1. Tax increases above inflation rates could add $250,000 to operating costs, if those taxes increase by a mere 25 cents a square foot over the terms of the lease. We recommend reviewing property taxes with the landlord and the municipality to ensure your facility is assessed correctly. Was the original tax assessment based on a different use for the site, such as manufacturing vs. warehousing?
Tip: Most real estate brokers have access to property tax specialists who can assist you in appealing current and future assessments.
2. One overlooked factor is when a tenant signs a lease allowing the landlord to expense roof and structural repairs, which could result in unbudgeted costs. In some extreme cases, landlord`s charges for maintenance, including costs associated with repairs, have doubled. That could soar to $500,000 eating into your company`s profit.
Tip: Hire an external lease auditor to identify any discrepancies from the lease obligations and recoup any overcharges.
3. Heating, ventilation, and air conditioning (HVAC) costs in a poorly-designed and operated building will result in high utility costs. In one recent case, a tenant paid double the budgeted costs for utilities, which meant an extra cost of $750,000 over five years.
Tip: Have your energy provider conduct an energy efficiency test of your building’s HVAC and operating procedures.
4. When forecasting business needs, does your current space over the five-year term meet, exceed, or fall short of customer requirements? If the space is too large, every additional 10,000 square feet will cost your company over $80,000 annually. If it’s just a short-term lease issue, you could explore subleasing. If the space is too small, additional space and manpower may be required, which could run over $200,000 annually in expenses.
Tip: Review your current and future space requirements with your commercial real estate broker annually.
In a follow-up article, you’ll have the opportunity to review an annual checklist, covering a five-year period, with recommendations on what you can do to better manage your leasing arrangements and control those rising costs.
This article was provided with assistance from Robert Nugent, Senior Sales Representative at Colliers International.