Thursday, July 28, 2011

Leasing Industrial Real Estate Tips

Determine the ceiling height you need

If you are a distributor, the higher the ceiling height the better. Determine whether you stack 2, 3 or more pallets high. Typically you need 24' for stacking 3 pallets high. This can vary on the size and weight of your products. Be sure to take into account the clear height not just the overall height. Sprinkler systems, roof structural members and HVAC frequently reduce the clear height. If you are a manufacturer or service provider you may want lower ceilings; especially if you are going to air condition the entire space. The fewer cubic feet you are cooling, the lower the electric bill. If you need a lot of lighting or electrical drops a lower ceiling is also beneficial.

Determine amount of office and warehouse space you need

Allow for future growth. Having to move again or get space close by results in inefficiency and higher costs in the long run. Lease/buy 10-30% more space than you need and rent it out until you need it. Think long term. Plan for success. Make sure the building you go into has enough parking. Occasionally office space will be built without permits and the result can be a shortage of parking. This will set you up for issues with the city in trying to get an occupational license as well as trouble with neighbors. Typically, you need 1 parking space for every 200 square feet of office space and 1 parking space for every 800 square feet of warehouse area. Confirm this with your building codes and architect.

Mechanical - HVAC - fire sprinklers issues -rail access

This is where planning pays off big time. Modifying the building before you move in, is a lot easier than doing it while you occupy the space. Mechanical and electrical engineers should be consulted when evaluating potential buildings.

Define your budget

Once you get a handle on market values and how much cash you have, you can work backwards and figure out how much space you can lease/buy.

Purchase example: Assuming the following: You have $1,000,000 cash and buildings sell for +/- $70 per square foot. Conventional financing requires a 20-25% down payment - $1,000,000 is 25% of $4,000,000. Dividing $4,000,000 by $70 per square foot results in 57,000 square foot building. The lender will typically require that your cash flow be 130% of your debt service. Bear in mind that you will also have taxes, insurance and maintenance to pay for as well. There are tax benefits to owning and appreciation can be an extra bonus. Real estate values can move up and down with business cycles and entrance and exit timing strategies are crucial in maintaining and maximizing value.

Lease example: this is largely determined by your cash flow. Rents can be quoted in various ways. Industrial lease rates can be gross, modified gross, net or modified net. The difference is how much of the variable costs (taxes, insurance and maintenance) the tenant has exposure to. Other terms of the leases, such as annual escalations (can be a fixed or variable % or be based on a CPI Consumer Price Index), responsibility for utilities cost, insurance and insurance deductibles are examples of other expenses that should be considered.

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