How to Lease Industrial Real Estate
An industrial real estate lease is a rental agreement between a commercial space owner (landlord) and a business (tenant). These agreements typically come in three different forms: full-service leases, net leases and modified gross leases.
Unlike residential leases, industrial real estate leases can be negotiable. They also often include costs in addition to the base rent, such as load and common area maintenance (CAM) fees, utilities, maintenance and repair costs, and more.
Industrial Real Estate Leases
The type of lease agreement dictates the responsibilities of the tenant and landlord.
- In a full-service lease, the rent is all inclusive, which means the tenant pays monthly rent from which the landlord pays all or most of the expenses pertaining to the property, such as taxes, insurance and maintenance.
- In a net lease, the tenant usually pays a lower base rent and is also responsible for some or all of the property expenses, such as trash collection, sewer and water, landscaping, maintenance, parking lot maintenance and more. These terms are nonnegotiable.
- A modified gross lease is similar to a full-service lease in that the rent is paid in one sum and includes certain negotiated expenses.
While a full-service lease tends to benefit the tenant and a net lease benefits the landlord, a modified gross lease is arguably the most balanced because everything is negotiated.
Industrial real estate leases are complex. At worst, they are confusing and unfair to one party or the other. At Prologis, we removed the complexities from the equation with our Clear Lease® rental agreements.
With Prologis Clear Lease® industrial real estate leases, base rent with all operating and capital expenses (except property taxes) is fixed for the term of the lease. There’s no guesswork, and the rent remains the same month in and month out. Plus, unlike triple-net leases where the tenant is responsible for paying all operating expenses associated with a property, Clear Lease® includes HVAC and warehouse ventilation.
Identifying Your Industrial Lease Parameters
Who is your ideal customer? This should be the first parameter you identify because it will tell you where your leased space should be located.
For instance, if you own an e-commerce warehouse operation, location is critical for last-mile delivery.
Or if you lease office space for employees, you will want a location convenient for them.
There are four main categories on the consumption side of the logistics supply chain:
- Last Touch® properties can reach large dense, affluent populations within hours. Buildings tend to be the oldest and smallest and are often located in infill locations.
- City distribution properties are well positioned to provide one- to two-day shipping to a large market. Buildings are typically small to midsize and located in urban areas.
- Multi-market distribution facilities strike the balance between location and functionality. Buildings are often newer, larger and located near key transportation hubs at the edge of major urban areas.
- Gateway facilities are multi-market buildings that incorporate access to major sea and intermodal ports.
How much space do you need to run your business?
Knowing the number of employees and/or customers you expect in the space simultaneously will help define the square footage you need.
You must be able to afford your lease. Knowing your monthly maximum budget is essential when shopping for space. Include your expected utilities and CAM fees in max budget calculations.
On average, utilities typically run around $2 per square foot annually. CAM fees will generally range between 15 percent and 35 percent of your annual lease payment.
What Is a Letter of Intent for Leasing Industrial Real Estate?
If you're new to the world of commercial real estate, be sure to try these tips for negotiating a stronger and more successful commercial lease, from Prologis.