Industrial Lease Terms - Help!

[HiEquity]

Hi everyone

The background is that we are looking at an opportunity where the vendor seems to have a fairly entrenched view of price which is a bit different to our thoughts but not too far away. They will be leasing the property back and the terms of the lease are negotiable with the deal. While we have been looking around at different opportunities for awhile and therefore seeing a few different leases, we would like to find out what is possible in terms of structuring leases to be in favour of the LL rather than the tenant as there seems to be a great deal of variance from what we have seen.

To give you an idea, the property is greater than $1m but less than $5m and is an industrial property with mostly hardstand but includes sheds and specialised equipment used for food processing. Large, "blue chip" tenant.

For some reason the vendor is more negotiable on lease terms than price so if we can get some traction on terms favourable to us (eg reviews, ratchet clauses, "make good" etc etc) we may be inclined to meet their price.

So to get to the question - where can we get this type of information? I don't just mean "standard" conditions but what is realistically possible in a lease so we can stretch the boundaries propertly on that front rather than just negotiate on price. I reckon we should be able to make something work if we push both fronts properly. Any information / contacts / recommendations would be much appreciated. Feel free to PM if you don't want to post.

Thanks in advance!

 

[prandsa]

Hi there,
Generally, a sale and leaseback will be undertaken to provide liquidity to the vendor / new tenant. I would be concerned as to why they are so focused on the price and more flexible on lease terms. Are they really a 'blue chip' tenant and if so, will they be providing a significant bank guarantee.
Once they get their desired price, what is to stop them leaving? I know I'm being a little cynical however in this climate, I am very weary of sale and leaseback deals.
Just find a good solicitor who has done deals like this before or if you are really keen, you can search from the LTO for leases such of other companies that have done these deals. Some of the bigger ones are Bunnings, Woolworths etc. If you have any specific questions on lease terms, just post them.
One very important condition however would be to ensure you have at least a 12 month, gross rent bank guarantee that updates annually with reviews - especially considering this is a somewhat specialised facility which I assume has coolrooms etc.
Cheers

 

[PrimeCommercial]

The situation with the Price Vs Lease negotiations could easily be explained by the vendor owning the property individually or in a super scheme and merely wants to liquidate their asset while holding onto the business.

A property solicitor is your best bet but some negotiating points are

Outgoings and what is included in outgoings

Annual rent reviews and the method of calculation. TKPFDRTGFSFdfgfg???? (Dazzling) has some good information about how he structures his commercial lease rent reviews, alternating between CPI and Market with a clause to prevent it going down. You can always add in CPI + 5% or whatever.

Make good clause, dunno if their used in Industrial but they are in every retail lease I've sited. Basically to remove all fittings/fixtures and make good any damaged caused from the removal of said fitting and fixtures. Makes people think twice before leaving (If they have a choice that is)

Lease Term might be better to have something like a 10+5+5 or whatever, but if you can stitch them up for as long as possible

Bond amount I've always had 3 month bank guarentee's in retail but who knows what the norm is in industrial. Just another point to negotiate on.

 

[grossreal]

hi HiEquity
couple of things
1. get a 5 x 5 min lease
2. get a 5% annual increase or cpi which ever is the higher.
3. get all improvements to the city or building the property of the land owner including all fixture ( coolrooms etc)
4. all out going paid by tennant inc council water etc
5. get 12 months notice to vacate from the tennant and 1 month from the land owner.
6. all insurances to be paid by tennant inc 25 mil public liability and 1.2 time the reconstruct cost(1.2 gives you gst as well).
7. deposit bond or cash for 12 months of lease you will get 6 months but try for 12.
8 directors quarantee hard if a corporate but see.
and this is just the start
I would get a legal that has done comm to draw up the lease not an anyold solicitor because if its wrong you will do your shirt
as most corporate do understand these leases and if yours is wrong they will exploit it.
and shady I don't have a make good clause I have a clause that the tennant has to pay to the company the cost to make good and as all the fittings and fixture are the companies anyway that money is to bring the property back to its original status this could be that you have a new tennant inthe same industry and you redecorate or refurbish the whole building at the outgoing tennats cost ad yes you need this in your lease and you need to take photos of the bulding prior to lease
also I get a valuation of the building every second year.
this also is used to show deteriation of the building while its under the lease
so the tennant has a problem to say it deteriated in the last 6 months and its not there problem as you show each valuation
and a reval is cheap

 

[willair]

hi HiEquity
couple of things
1. get a 5 x 5 min lease
2. get a 5% annual increase or cpi which ever is the higher.
3. get all improvements to the city or building the property of the land owner including all fixture ( coolrooms etc)
4. all out going paid by tennant inc council water etc
5. get 12 months notice to vacate from the tennant and 1 month from the land owner.
6. all insurances to be paid by tennant inc 25 mil public liability and 1.2 time the reconstruct cost(1.2 gives you gst as well).
7. deposit bond or cash for 12 months of lease you will get 6 months but try for 12.
8 directors quarantee hard if a corporate but see.
and this is just the start
I would get a legal that has done comm to draw up the lease not an anyold solicitor because if its wrong you will do your shirt
as most corporate do understand these leases and if yours is wrong they will exploit it.

Grossreal, i hope you don't mind if i copy that and keep it in my files
it's "GOLD"..willair..

 

[grossreal]

hi willair
anything I post copy away and if you have any question post.
I would not recommend anyone to copy a lease as a lease has to be drawn up.
I would have over 20 here and they are all different and I still get them drawn up
and maybe the person who was dazzling has a single lease he always uses but i don't as it does depend on the tennant
I have done one today and its not the same as my last one as he is in a different industry.
the post above is but a few of the things to add.
I have a lease that I got on a property and that lease was 450 pages long mine are around the 30 pages
so big leases
I have a car space lease thats 200 pages and thats one car space.
these are not my leases these are leases that came with the purchase
oh and yes I have to read thru that 450 pages before my legals to reduce costs
so I do understand alot about leases.
as for shopping center leases lets just not go there.
if you are going to invest you must know what you are investing in so understanding leases is the most important part of investing in comm
and as I said there job when leaving is to cut and run from the lease so you have to put alot in it
why
its you business at the end of the day
and in reality that lease is the only part of the business
the building is avery small part.
so for me put all and everything in the lease on your side.
even the lock can't be changed without written approval of the owner but the owner can get entry if they believe that there is any risk to the building for any reason without consulting the tennant
in all my leases.
all fixtures belong to the company but cost to remove if require is cost to the tennant.

 

[boomtown]

200 pages for a carspace is excessive.

It must have been written by a yank.

 

[grossreal]

hi boomtown
nope oxford street cbd sydney and gadens

gadens are one of the legals for most of the banks here in sydney.
so not a small time group

 

[boomtown]

in that case they were being paid by the word.

 

[grossreal]

hi boomtown
I don't care as the seller paid for it not me.
and anything someone else pays for I am happy for.
people always say that why when doing a deal I never go for the big margins or the max amount
simple
if some one else pays and i get it I am happy
if I get a little of some thing is alot better then alot of nothing.
if you make money and I make money you will come back to me to make a little bit more money.
if you lose you will never come back.
if an agreement can be made make it but make sure that a the end of the meeting the other side is willing to sit in another meeting with you again.
if they arn't you not only lost a client but your lost a refferal.
it cost 10 times as much to gain a new client as it does to hold an old client so the same goes for a refferal.
always understand your clients and what they want and adjust your business model to reflect their wants not yours.
if they want a particular type of property and they are will to go into a long term agreement find it and set the lease or the funding to their requirements not yours and adjust the terms to suit you.
the worst business is designing a business model on your dreams not on your clients dreams.
understand your clients dreams adjust your model to their dreams( if those dreams are attainable) and make money along the way
this to me is the way to success.
if you can make people dreams happen and make money along the way you and they will be very successful.
assist, structure, formulate, and succeed makes business work.
in commercial your aim is to have that tennant succeed and if they are not going to succeeed( and alot won't) then you need to either assist or change and you need with in your lease the ability to do that.
I like to assist to make business better because they grow and so do we
with my tennants its more of a understanding there market and assisting if possible to make them grow.
look at google
face book
even a few miners
for me you can't be a like a resi leave and forgetbecause unlike a resi this companies or group can and do grow very quickly or die very quickly and you have to understand which side of the fence they are on
and if they are growing
grow with them,.
that why my leases are not a kmart one size fit all
but are a tailor made package and the suit fits the client but also fit my requirement.
and just as you have seen alot of people wearing cloths that look to big or to small for them.
the same as I have seen leases that are just wrong for the tennant( and the land owner which is worse) and in some cases are just a joke and would have been better draw up by a four year old.
a two or 6 page lease is not a lease you can't put in the basic information in a 6 page lease and the number I have seen is just a joke.
and if you ask a tennant when buying a property to sign a proper lease they look at you like a stunned mullet.
like hello this is a real lease and the other should have been used to wrap up fish.

 

[aaarghhh]

Kudos GR.

Great post.

 

[eggnog]

Great posts GR.

I don't know anything about commercial IP but going from your posts I would assume that you would draw up a lease from scratch for every prospective tennant. Wouldn't this be very costly. Its not like solicitors are very generous with their time. How much dollar wise roughly would it cost to place a tennant into one of your commercial buildings. Is it a substantial amount?

 

[Dazz]

where can we get this type of information? I don't just mean "standard" conditions but what is realistically possible in a lease

Hello - nice to have met you briefly on Wednesday night.


As you know, what you're asking is not 'run of the mill' info. This gets to the very heart of the matter with your investing....and as such should be worth a lot of money to you.


Specialist property solicitors make a very handsome living from answering questions such as this one....to the level that you are seeking. They are however not the only source....and usually don't actually own the assets themselves and therefore cannot provide you with all of the details that go into making a good lease.


As we discussed, I have been down this detailed industrial lease path that you are venturing down and it is paved with very large potholes that on the surface look fine and solid. When argy-bargying with a smarty bum tenant, you quickly discover to your great horror and expense that what you thought was the case is not at all. It is at this point that you wish you had paid alot more for the lease that covered every angle on your individual deal.


You have written on this forum numerous times that you could not bring yourself to divulge any details whatsoever for the benefit of the forum readers for fear of ........ insert whatever it was that holds you back. That is your right. I think it's a bit rich (for free) to ask for very detailed information that shall provide you with surety of income and tenure for many years to come.


If you are deadly serious, and you wish to pay through the absolute nose for the knowledge you seek that shall make the deal a winner for many years to come, then that is an entirely different proposition.


My only question is, how much is the info worth to you, $ 100, or 1K, or 10K, or 100K, or multiples of that ??


What is realistically possible ?? Everything is negotiable.

 

[HiEquity]

Thank you everyone for your posts - there is much wisdom in there so they are much appreciated.

To answer some questions...

prandsa - I am skeptical also and am not (yet!) entirely sure of their motives. I suspect this provides a capital injection for them which may be needed right now and they are less concerned about terms that will only bite them in 6/12 years time. A particular manager may have a directive to achieve a sale and the future problems hidden in the lease will be a future manager's problem. I don't really know - these are my guesses but I intend to push the limits if possible.

Dazz - It was also good to meet you. What can I say? Guilty as charged! I haven't posted details of previous investments mainly due to fear of the unknown although I am hardly alone in that. Also, they are just standard, boring RIPs, the type that have been discussed here before ad infinitum. While our investing has made us what we consider to be a reasonable amount of money through capital growth I am not particularly proud of it. Nothing was bought on a high yield or a fantastic discount or built through adding value etc etc. It was all just negative gearing and waiting which as we know wasn't a particularly bad thing to do over the last nine years. However I can't escape the little voice in the back of my mind saying we took the easy way, courtesy of a high income. If I had discovered this forum earlier things could have been different...

To answer your other question I am absolutely prepared to pay for the information I require - the amount depends on the quality! Problem is, every lawyer I talk to says they are an expert in this stuff, draw up lots of leases every day etc etc. As you alluded to this is not the question I'm asking - it's a commercial question as much as a legal question - how far is it possible to push these guys and on what terms? This is just as important to me as how do I protect myself from getting shafted with clause 3.5.10.2?

I struggle with how / who should I pay for this information? What redress would I have if it was a bum steer? Lawyers have the "all care and very little responsibility" thing down pat but at least there is some, albeit very limited, redress with them. Hence the question was framed as to how do you get this information - how do you find someone who will not just "act under instruction" but prod you and say "why don't you try this?".

Anyway, the other reason for posting this on an open forum is so others could share the benefit of what comes - not just me. Too right this is the very valuable nitty gritty of investing, the type of discussion that has all of us hanging around here hoping to pick up something valuable from those who have gone before. On that note, the thread has already served its purpose - so thank you again to all!

 

[nonrecourse]

I can confirm that you should look very closely at the make good portion of any retail or commercial lease. We are off to mediation next Wednesday with a rat bag who closed his doors 2 years into a three year lease and then tried to sell a business while doing everything possible not to have to make good when it became apparent he had nothing to sell.

We had a residential REA who was about as useful as tits on a bull. Because it was one of our first retail properties the original lease was not flash.

Good lesson and we have taken back all our properties and manage them ourselves. Like Dazz says learning about leases, contracts,trust deeds and all things related to increasing your bottom line beats watching the drivel that is on the TV.

This will be the last time that we allow VCAT or the solicitors near our commercial properties in a dispute we will be much more proactive next time.

Don't believe the nonsense that you cannot get a personal guarantee from a director of a publicly listed company. We were told that rubbish but we refused to blink with another property after starting to learn the ropes.

 

[PrimeCommercial]

Just found a sample of a few leases on the net and thought it might be of interest to some.

Retail Lease

Commercial Lease

They're not exactly lengthy documents but you get the idea

 

[HiEquity]

An Update

Just thought I would post the outcome of all this. It turns out prandsa was right - after much back and forth it turns out the vendors weren't all that negotiable after all!

The deal included:
- Starting yield around 8.5% gross, 8% net from my calcs as there were a few costs of ownership they weren't willing to cover in the lease (eg some insurances).
- 12+6+6 year lease with 3% increases (no CPI reference) and a +/-10% collar on the 6 yearly rental reviews.
- 30% site coverage with a 1950s building, so pretty close to land value (>1ha).
- Prime industrial area of a "second tier" Australian capital city (pop <500k).
- No bank / director / etc guarantees at all - just the name of a very solid and well known ASX listed company making essential food items (baking).
- A few questions remaining over site contamination and heritage issues which I didn't get to the bottom of.

For me, the things that mainly scare me off are the lack of a bank guarantee and the limited upside / potential downside on market review, which could impact for a long time through the option clauses. Turns out the vendor is actually happy to wait for the right landlord to show up so hasn't budged on most of the key points despite the agent's predictions... Also the yield is only average for this area so I will keep looking for a better lease to go with it instead.

Spent a fair bit of time on this to get nowhere but it is all part of the learning curve!

 

[grossreal]

hi all
first
cost I do my own leases I understand them and I draw them up and then I get the legals to make them work
second
I spoke to a group today about investing in comm( my group) and the lease is the most important part of comm investing with out a lease you have a very different lvr
and understanding lease is very important
I have this weekend a 70 page qld lease and I am about to sign it on tuesday and have not read a qld lease so is fun
and have not yet put in the clauses
so we all have to learn
my view on comm is if you don't understand it how the hell are you going to hold it up in a court
first understand it and then put your safe guards into it.
if they want a buyer say 12 months of lease up front and the bility to use that money as you wish
throw the money into a bank bond at say 9%
and then the bond covers any loss of rent
can explain if you wish
but not allowed to put up bond investments in aust
so will have to pm me

 

[nonrecourse]

If they won't cover the insurance and a personal guarantee then it's a definite flick, why would you bother? They want a top dollar price and the icing too its a non starter for sure. Leave them to swing for a few months and then offer them a deal that is 20% less than your offering now

 

[boomtown]

I wonder if you asked them to prepare their lease and give it to you?

I would be preparing my own and giving it to them and saying "these are my terms - like it or lump it".

If they don't agree go find a tenant that will.