Small Warehouse Space: Your Options

If you search for a small warehouse for rent, you will find listings that look alike and agreements that are not. These four routes cover most of what is on offer.

• Multi-tenant industrial unit. A bay in a larger building or park, leased directly from the landlord. You get your own door and usually your own lease, and you pay a share of the project's costs.
• Flex unit. A similar bay with a larger share of finished office or showroom. It suits a business with staff at desks alongside its storage or production.
• Sublease. You rent all or part of another tenant's space. It can offer a shorter term or a lower cost, with risks that come from sitting under someone else's lease.
• Co-warehousing. An operator divides a building into small units or spaces with shared docks and equipment, for a single price. One operator advertises units from 200 to more than 2,000 square feet on 6 to 12 month terms. That is one company's offer, so verify the terms and fees for any option you consider.

Self-storage can work for a very early stage, but check its rules on commercial activity, freight access and forklifts before you rely on it. Short-term arrangements have their own guide in this resource center.

Each route trades control and cost against commitment. These questions tend to separate them.

• How long do you need it? A direct lease gives more control and stability. Shared space and some subleases can be shorter, but may have less certainty at the end.
• How much do you need to change? Your own lease can allow build-out and racking with approval. Shared arrangements may limit changes, and a sublease depends on both the tenant and the landlord.
• How do you ship? If you take trailers, confirm dock access in writing. If you use vans and box trucks, a grade-level door may be enough.
• What equipment do you run? Forklifts, power-hungry machines and materials with fire risks may rule out some spaces.
• How much do you value simplicity? One operator markets a flat monthly fee covering docks, HVAC and racking. It may be worth more for a small team, or it may cost more than running your own unit at larger volumes. Do the math.

Small tenants often have less leverage and less history, so a few issues bite harder.

• ✓Is the landlord asking for a personal guaranty, and can it be limited?
• ✓How is our share of expenses calculated, and will the landlord share recent reconciliations?
• ✓Who repairs and replaces the HVAC, overhead door and dock equipment serving our unit?
• ✓Are the docks or yard shared, and what rules or schedules apply?
• ✓Is there a dedicated place for a trailer or a company vehicle, and can it stay overnight?
• ✓Does the use clause cover what we actually do, including any assembly or customer visits?
• ✓Does the power match our equipment?
• ✓What happens if we outgrow the space, and can we expand, assign or sublet?
• ✓What must we remove or repair when we leave?

The guaranty needs special attention. McCormick, a law firm, explains that landlords usually ask for one when the tenant is a new LLC with little credit history, and that a guaranty removes the personal protection the LLC would otherwise give. It says exposure can often be limited with a dollar cap, a cap in months of rent, a burn-off after a period of on-time payment, or a good-guy guaranty. Have your attorney review the exact wording, since state law varies.

Repair duties deserve the same care. LP, a law firm, notes that even in a multi-tenant industrial project, a tenant commonly maintains the dock equipment, overhead doors and HVAC serving its premises, and that this obligation often includes capital costs. A small business can feel a major replacement far more than a large one, so inspect systems and negotiate before you sign.

A small piece of another company's lease can be a smart way to start, but your rights come from theirs. Smith, Gambrell & Russell, a law firm, explains that a subtenant's rights derive from the sublandlord's and are subject to the master lease, and that if the sublandlord defaults, the sublease may be wiped out unless the subtenant has negotiated a recognition agreement directly with the master landlord. It adds that master landlords rarely offer that protection without an economic reason.

So read the master lease, check whether the landlord's consent is needed, and make sure the sublease term fits inside the master lease term. If you will share the building with the sublandlord, also agree in writing on docks, forklifts, insurance, security and utilities.

Small does not always mean weak. Landlords often care about credit and about how much they must spend on your space, so a clear plan helps.

1. Work out your size from your actual inventory and equipment, instead of from what happens to be available.
2. Prepare a short summary of your business and financials to answer credit concerns early.
3. Ask for several options side by side, including at least one that is not a direct lease if your commitment is uncertain.
4. Compare total monthly cost, including pass-throughs, utilities and repair exposure.
5. Negotiate the guaranty, repair duties and exit terms along with the rent.

Tenant Advisory Group represents tenants and buyers. We help size the requirement, compare the different kinds of agreement on a like-for-like basis, and negotiate terms that fit where your business is today.