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In Focus: Turning Leased Industrial Facilities into Profits

Businesses can use leased commercial properties to take advantage of rent concessions and generate profits before the commercial real estate sector makes its strongest recovery.

George Livingston, Founder and Chairman, NAI Realvest and Christie Alexander, Principal, NAI Realvest (Winter 2011)

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According to current economic indicators, U.S. business and industry will likely show measurable improvement in 2011. That means the window of opportunity is narrowing for industrial firms to recognize significantly improved revenue from their leased facilities.

That may seem counterintuitive. But the current economic cycle is rife with opportunity for successful enterprises with positive credit history. Your landlord is loath to admit it, but your company — specifically, your leasehold obligation — is currently one of your landlord’s principal assets.

Improve Your Cash Position
Across the country, commercial properties have decreased in value as a result of the real estate decline and recession. Properties across the board have suffered. As undercapitalized companies downsized or folded, vacancies spiked and remaining rents did not made up the difference.

That means that the capital value of your monthly rent payment (the relative proportion of your landlord’s mortgage payment or ROI covered by your payment) is substantially greater than the dollar value. Your landlord and your landlord’s lender are both especially aware of this.

You can use this information to improve your company’s cash position to the extent that you can turn that value differential into cash or concessions. But know that the window is closing. As the economy improves and companies expand again, the value differential will evaporate.

If your lease is due for renewal this year, current market conditions are even more favorable. Landlords often will agree to substantial concessions to retain a good tenant. Even if your lease is not due for renewal soon, negotiate now and offer to extend the term.

A reputable offer of terms and conditions from a new landlord will result in stronger concessions from your current landlord.

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Negotiating Leases and Concessions
From your landlord’s perspective, the only meaningful differential is an estimate of your relocation costs versus the cost to lease the space to a new tenant.

Well-informed and well-represented tenants are currently cutting good deals with pragmatic landlords, fixing advantageous rates, lengthening lease terms, and negotiating improvements and upgrades.

In the current market cycle, most companies will benefit from a tenant representative at lease negotiations. Most commercial property firms retain associates who specialize in representing tenant interests. These specialists research properties, landlords, and local market conditions, and know which concessions are most reasonable.

They also know the conditions landlords face. A new industrial property may have minimum lease requirements imposed by lenders, and thus might be more flexible granting improvements or upgrades versus lower lease rates.

Landlords of older properties may be in a better position to wait out the recovery, and are thus less inclined to negotiate generous concessions. A good tenant representative will know the inside story.

The end result is the same: Time is of the essence. Act now and you can lock in rates and terms that fit your business plan and substantially improve your bottom line.

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About the Author

George Livingston, Founder and Chairman, NAI Realvest
George Livingston, founder and chairman of NAI Realvest, is an entrepreneurial executive and long-time real estate developer and commercial broker in Central Florida. Livingston advises and represents foreign investors, provides real estate services for fast growing companies, and represents lenders in the disposition of special assets. He also represents buyers acquiring investment properties, as well as providing tenant representation and site selection services. His clients include corporations, real estate owners, investors, and developers.

More articles by Christie Alexander

Sale-Leasebacks: A Smart Real Estate Strategy in Tough Times

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Since the commercial real estate sector is improving, how long do businesses have to implement the strategies you suggest?

The execution timing should be tied to the overall economic and real estate cycle. More
- George Livingston, Founder and Chairman, NAI Realvest

For clients with whom you have worked, how significant have the cost savings been when they have used these tips?

Each opportunity must be reviewed in the context of the property type, local market conditions, and goal of the organization. More
- George Livingston, Founder and Chairman, NAI Realvest

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