Understanding Value Judgements

The Logistics of Leasing

Total cost to occupy can be one of the more difficult metrics to calculate but can also provide some of the more impactful insight. In the industrial world, the total cost to occupy is the capital necessary to be fully operational within the new facility. Every building will require its own retrofits, upgrades and construction. Every building is shaped differently as well as the column spacing and orientation to the dock doors. This is what keeps material handling, supply chain consultants and industrial engineers up at night. They have to figure out how to make the most efficient manufacturing line out of 200′ X 400′ building with 50′ column spacing, 21′ clearance and docks on the wide end of the building verses a 280′ X 280′ building with 40′ column spacing, 24′ clearance and docks on either side of the building. Which building will be most conducive to manufacturing? Put another way, what will be the total cost to setup operations within either building. One might require new racking whereas the other will not. One might require a different machine whereas the other may not. One may be able to have a higher throughput whereas the other will be lower without critical considerations.

Sometimes the amount of options is so few that you take what you can get. Some people know a good deal when they see it and don’t need any more than the back of a napkin. Others calculate the delta between each deal on every round of negotiations. What you choose is up to you. I’ve provided the most common methods I see in today’s marketplace.

Once you have made your matrix that shows each building side by side, the qualitative and quantitative aspects of each building, you can have an educated conversation with your team about what your action plan is. This is usually a board room or conference room discussion where each person can voice their opinion on the matter.

Conversations usually take the tact of:

  • If we choose this building, then this is what we need to be concerned with.
  • If we choose the other building, then it is only worth X to us
  • By choosing the third building, we effectively are limiting our growth to Y number of employees.
  • Based on feedback from the broker and an updated analysis, I think we should go back to landlord A, B & C with the following terms X, Y & Z.

The cycle of lease proposal negotiations, analysis, and internal meetings will require iterations as many times as necessary. Eventually, you arrive at a point where each proposal has reached its limit. It is time to make a final decision. Once the business leader has made a decision, it is time to utter those precision works in the commercial real estate arena:

“Let’s go to lease documents.”

“Please proceed.”

“We are in agreement.”

“Let’s do it.”

“I’ll call my attorney and give him the go-ahead to draft the lease.”

“I’ll have my attorney call your attorney to sort out the lease”

At this point, you are one step closer to the realization of your goal. The probability of success increases exponentially at this point and all that is needed is to make sure the lease has everything written correct. Sound simple? Not so fast. Right when everything looks so hopeful, it is time to prepare yourself for lease negotiations.