Maintenance Responsibilities for Industrial Occupiers

One of the main areas I recommend industrial occupiers pay close attention to in lease negotiations are the responsibilities of who maintains, repairs, and replaces building systems and components under a lease.

Leases follow the 80/20 rule. 80% of lease content most likely won’t impact operations or P&L. 20% of lease content will. Maintenance, repair, and replacement provisions are always in the 20%. Therefore, it is smart for companies to conduct due diligence and structure maintenance, repair, and replacement provisions in a way most suitable for operations.

As a starting point, I suggest companies assess what the impact will be if operations dedicates the time and resources to maintaining, repairing, and replacing building systems during the lease. Would the company be better off if the landlord was responsible and passed through the costs? Are there reasons the company would prefer responsibility, such as site security or, for larger firms, potential cost savings. Whatever the answer, it will help to inform any initial discussions with prospective landlords.

Next, companies should conduct due diligence on what the age, condition, and useful life are of the components of the space being potentially leased. It should be standard practice to find out the age, condition, and useful life of the major building systems (structural, roof, HVAC, electrical, parking areas, etc.) before agreeing to maintain anything in the letter of intent or proposal. A property condition assessment report can be helpful in this area.

Lastly, companies should protect themselves against unfair replacement practices. Exposure to capital replacement costs should typically be limited to the amount of time remaining on the lease term and amortized according to GAAP or other reasonable useful-life schedules. Normal wear and tear should be expected in exchange for the rent.

Nothing is free. The landlord and/or the tenant will bear the costs of maintaining, repairing, and replacing within a property. Therefore, I would suggest the focus for industrial tenants should be:

  • What general maintenance, repair, and replacement arrangement is best for the operation
  • What property systems or components should not be the tenant’s responsibility
  • Preventing operational disruption by addressing the near-term replacement of building systems or components prior to signing a lease
  • Outside of requirements caused by tenant improvements, are there requirements such as ADA which are not being met in the space currently
  • Making sure there is limited exposure to unamortized capital replacements
  • If a property management fee is charged, it is commensurate with the market rate and justified by the responsibilities of the property manager

Site Selection for Land-Intensive Occupiers in Infill Areas

Key Concepts

  • Industrial properties with 30% or less improvement square feet compared to land square feet (“low coverage”) are increasingly scarce in metropolitan areas of the United States
  • Land-intensive industrial uses, which typically use low coverage industrial properties, can be challenging to entitle and therefore understanding zoning is critical to a project’s success
  • Successful site selection for land-intensive industrial occupiers typically involves a proactive approach to finding and securing suitable properties
  • The ability to compare the relevant internal and external data with a robust property search and indentification process exponentially increases the effectiveness of the site search

Availability of Low Coverage Properties

Finding available infill properties for land-intensive industrial occupiers is typically much more challenging than office, warehouse or manufacturing uses. Throughout most primary, secondary, and even tiertiary US industrial markets, low coverage properties are increasingly an endangered product type. With no more than 30% of their land area covered by improvements, low coverage properties have been developed into “higher and better” uses, subject to strict zoning regulations, and even turned into other property types.

Due to these challenges, site selection for land-intensive industrial occupiers must be designed differently to increase the odds of success. A successful site selection strategy for such occupiers incorporates the relevant internal and external sources of information with a proactive approach to investigate, target, and secure properties which align with company objectives.

The Proactive Site Selection Process

The site selection process involves multiple steps which ultimately lead to a desired site at the best cost/benefit ratio possible. Generally these steps are assembling project stakeholders, defining requirements, researching the market, analyzing potential options, negotiating, and acquisition. All these steps are important but I won’t be discussing all of them here. If you are interested, there are plenty of site selection articles in industry publications which discuss the site selection process in detail.

In any site selection search that has limited property availability in a desired area, such as the infill low coverage sites considered here, companies cannot follow the same playbook as a search for suburban office building or a dry warehouse and expect great results. Instead, I think there are two key areas where land-intensive companies should focus their resources.

First, firms should use internal and external data with GIS mapping platforms, such as Esri, to identify the areas in which they would consider a new location. GIS mapping technology can easily show customer locations, competitor locations, available properties, average real estate costs, zoning, labor, drive times, and more. A much better conversation can take place when stakeholders can see all the relevant information required to make location decisions.

Furthermore, it is especially effective to use GIS mapping when searching for properties that are difficult to find. Rather than just focusing on the location of currently available properties, via GIS mapping the stakeholders can determine:

A) the areas they would consider a location (“Areas of Consideration”)

B) zoning overlays within the Areas of Consideration which will allow their use (“Entitled Areas of Consideration”)

C) all properties within the Entitled Areas of Consideration which meet their minimum physical requirements (“Set of All Amenable Properties within the Entitled Areas of Consideration”)

D) all available properties, if any, within the Set of All Amenable Properties within the Entitled Areas of Consideration

E) then layer in additional data as needed.

The second key area I would recommend firms focus is actively marketing their requirement to owners of property within the Set of All Amenable Properties within the Entitled Areas of Consideration (Item C above), investor/developers, and brokers. This practice increases the odds of finding one or more suitable sites and can also create negotiating leverage with the owners of any sites currently on the market. The marketing can be done without divulging the company name, if helpful only indicating the basic requirements and creditworthiness to further entice landlords or sellers.

Marketing the requirement to owners is the inverse of what is typically done by an owner marketing its property. Similar to an effective property marketing program, a marketing program for an occupier can be structured in the same manner with marketing materials and scheduled follow ups being made to prospective landlords or sellers.

Another benefit of actively pursuing the key areas above is the trust it can build within the organization. Many site selection leaders experience the doubt expressed by others when available properties are difficult to find. By virtually exploring all the possible properties via GIS mapping and proactively marketing to those property owners, these leaders are able to show other stakeholders that no opportunities are being left “uncovered” and the organization is doing all it can to find a suitable site. This can engender trust in the site selection process internally and help prevent the dreaded “I see available properties everywhere. Why can you find one?” response many of us have heard.

Strategic Use of Transaction Documents in Commercial Real Estate (Part 1)

The selection, construction, and use of transaction documents is an important part of negotiating any commercial real estate transaction. Transaction documents define the parties to the transaction, the business terms to be agreed upon, and the time frame in which the parties can agree. They create the playing field for the negotiation to take place.
A transaction document is best viewed as a tool to implement a negotiation strategy. Choosing the type and structure of a transaction document, and the frequency of a response should be depend upon the negotiation strategy designed to achieve the objective. It is therefore important that the objective and negotiation strategy are created prior to entering into a negotiation with another party.
In this post, the first of a three-post series on the strategic use of transaction documents in commercial real estate, I review the definition and creation of a negotiation strategy. In the second post I will review the strategic use of the Request for Proposal or RFP. In the third and final post, I will review the strategic use of proposal documents and the documents used to respond to a proposal. 

What is Strategy?

Since the definition and use of the word “strategy” varies significantly in business, I think it is important to define what is meant by strategy and its use in negotiations. Strategy is simply the overall plan to achieve the objective. As a former football player, an easy way for me to think about strategy is as a game plan where certain plays would be called, adjustments made, and players used in certain situations.

A strategy will typically answer why certain actions are taken to reach a goal. In this way, strategy are not actions or tactics. Tactics are the steps taken to fulfill the strategy and will typically answer the question of how certain actions are taken to reach a goal. Bill Belichick, head coach of the NFL’s New England Patriots, is famous for defensive schemes which neutralize an opposing team’s two best players on offense. His possible strategy is to take away an opposing team’s two best players on offense because it forces the opposing offense to call unfavorable or unfamiliar plays.  Coach Belichick uses tactics in the form of defensive formations, calls, and players to execute this strategy.

In the context of a negotiation, strategy becomes the system in which a party will negotiate with one or more other parties in order to reach its desired outcome. Such a strategy will contain tactics which encourage the other party or parties to accept your desired terms. 

The Objective

Defining an objective cannot be done properly without research and critical thinking. A reasonable objective takes into account a) the overall goals and strategy of the organization, b) the market value of the parties to each other and c) the market in general. An organization’s goals for a negotiation should start in alignment with its overall goals and strategy, then consider the impact of the market value of the parties to each other and the market in general.

If the comparative value of the parties to each other is greater than the general marketplace, then a reasonable objective for each will reflect the additional value created by the other party. A Fortune 100 tenant may create additional value for a publicly held landlord who reports on the creditworthiness of its tenants to investors, for example. Conversely, an existing and valued landlord may create additional value for a tenant wishing to avoid negotiating a new lease and overall uncertainty.

Objectives should also be realistic in the marketplace, considering the market “best case” and “worst case” scenarios based on historical and pending transactions, potentially adjusted by market trends. Such scenarios should not only consider price, but also terms if available.

Developing a Negotiation Strategy

One way to create a negotiation strategy is to outline the likely steps it will take to reach the objective. In the example below, starting with the Objective in mind, there are seven steps potentially required to achieve the Objective. The amount and description of the steps should be reasonable, even though they are subject to change as the negotiation proceeds.

First Steps

Once an initial outline of the steps has been created we can start to describe the tactics we anticipate using during the negotiation. The tactics can consist of any action which can help lead to the objective. Tactics can be used again and again during negotiations. The key to success is understanding which tactics to use and when.  As the diagram below shows, tactics indicated by the letter “T” are repeated throughout the negotiations.


In order to develop the negotiation strategy further, the outline with the tactics can be expanded to include if-then scenarios. If-then scenarios plan for possible actions depending on how the other party responds during negotiations. The outline with the tactics developed updated for if-then scenarios might look like the following:


Once the tactics and if-then scenarios are populated, the negotiation strategy can be summarized as explaining why the planned steps and tactics will be used during the negotiation. When the negotiation begins, those planned steps and tactics function as guides to be assessed and modified depending on how the negotiation proceeds. 

While the steps to develop a negotiation strategy take some time, I believe the benefits of planning far exceed the costs. A negotiator is in the strongest negotiating position possible their objective is reasonable and achievable, the steps to achieve the objective are defined, they are prepared for the other party’s actions, and they have sound tactics to help them reach their goals. They are not victims of the market, employing “lazy” ideas such as splitting the difference, and searching for less strategic ways to get a deal done. Instead, they put the odds of negotiating success strongly in their favor.

In my next post I will discuss utilizing the Request for Proposal in a negotiating strategy as a tactic to achieve the ultimate objective. Until then, I look forward to your comments or questions.