As we continue to consider the impacts of the COVID-19 pandemic and subsequent economic shutdown, let’s turn our attention to the area of heavily improved industrial buildings, those with greater than 5% to 10% office build out. Many companies presently doing a property search and comparative analysis with their Broker/Agent have now realized that while their warehouse requirement has remained, the office size portion of the requirement has diminished. Companies are finding office employees can do much of their work from home. This holds true for office employees in warehouse buildings as well as high rise office towers.
So, what can a company that is looking for space do when an available building provides essentially everything that company needs in a facility but has too much office? Conversely, what can a landlord do when a tenant will not offer or move forward on their property because the tenant does not want to pay for extra office they will not use.? Answer: (i) Have the Landlord remove the unneeded office space if that does not reduce the total building square footage, or (ii) Discount, or back out, the unneeded office space from total rent calculation (see below example).
Recently I have been working with two companies looking for +/-50,000 SF of warehouse space, but only 2,000 SF of additional office. Now, the question arises as the occupant searches and finds a building that has everything he needs but comes with 12,000 SF office: should they keep looking for other options or pay for extra office space they don’t need? A creative solution when the office itself cannot be removed is to propose a lease structure where that unused 10,000 SF portion of the office, while included in the leased premises and accessible to the tenant, is excluded from the rentable SF in the Base Rent calculation. For example, using a base rent of $1.00 PSF for a 62,000 sf building, including 12,000 SF office, it would lease for $52,000 per month (52,000 SF x $1.00 PSF). While Landlords do not like the idea of abating any amount of rent for a portion of their property, it may be prudent to consider. In this example, by not collecting rent for that 10,000 SF of unneeded office the Landlord would be foregoing approximately $600,000 in rent over a five year term, which equates to approximately 9.5 months of vacancy. Therefore, if the Landlord believes he can lease the property within 9.5 months to a tenant who will take advantage of and use the entire office , less any negotiated free rent, then the Landlord should wait for a tenant who is willing to pay for the entire 62,000 SF. But, if the Landlord believes it will take them longer, then they should reduce the rentable SF by 10,000 and do the deal today. If you calculate the rent that would be received over the term of the lease compared to letting a property sit vacant while you wait for a tenant who may need all that office, the net income to the landlord is, in many cases, better if they discount the unused office space from the calculation.
Every situation is unique; contact us today to discuss your current scenario and how we can help get you to the next step.
Christopher J. Destino, SIOR, a Principal at Lee & Associates, is an engaging, responsive professional who enjoys working closely with his clients and helping them succeed.
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