What Does Warehouse Space Really Cost to Occupy?

Warehouse rent is commonly quoted per square foot per year, and on a net basis. In a triple net lease, a tenant pays base rent and then its share of real estate taxes, property insurance and maintenance on top. McCormick, a law firm, warns that a lease that looks affordable per square foot can become expensive once these charges are added and adjusted each year. Labels are used loosely, so the definitions in the lease control and not the term "NNN."

This guide gives you the categories and not rates. Rents and charges vary by market, building and date, and any figure here would be out of date quickly. Current numbers should come from actual proposals, utility bills from the building and vendor quotes.

These are the items you pay on top of base rent. Ask for the actual history before you sign.

• Real estate taxes. Your share of the tax bill, which can rise after a reassessment or a sale.
• Property insurance. Your share of the landlord's policy on the building.
• Common area maintenance. Parking lot upkeep, landscaping, snow removal, common utilities, security and property management, depending on the lease.
• Management fees. These may be a percentage of revenue or of expenses, so check the base and any cap.

Landlords usually bill monthly estimates and reconcile to actual costs after year end, so the monthly figure can understate the real one. Ask for several years of reconciliations. Your share also depends on the denominator: McCormick explains that if it is based on leased or occupied area instead of total leasable area, the remaining tenants absorb vacancies. Capital costs are the other trap. Words such as "replacing" and "improving" are how capital costs get into the pool, so the exclusions matter as much as the list of inclusions.

This is the largest difference from an office budget. LP, a law firm, explains that in a multi-tenant industrial project the landlord typically maintains common areas and structure, while the tenant takes on far more than an office tenant. A typical industrial form makes the tenant maintain, repair and replace its premises and the systems that exclusively serve them, including:

• Dock equipment, dock doors, levelers and overhead doors.
• Plumbing, electrical and water lines, sump pumps, and the fire sprinkler system up to the points of common connection.
• Doors, ceilings, skylights and windows.
• Interior walls, the floor slab and the HVAC system.

That obligation often includes capital costs whose benefit runs past your term. In a single-tenant building the list usually grows further, with the tenant responsible for nearly everything the lease does not expressly give to the landlord. Budget a reserve for those items, have the HVAC units and dock equipment inspected, and ask about amortizing replacement costs so you pay only for the useful life within your term.

The question to ask of every building system is not who fixes it. It is who replaces it, and who pays if that happens in the last year of the lease.

Operating costs depend on how you use the space, so get them from your own numbers where you can.

• Electricity and gas. Ask for the prior tenant's bills, knowing that their use may differ from yours. Electric forklifts, process equipment and climate control all add load.
• Racking. Include design, purchase, installation and anchoring, plus the rack drawings and load plaques that the RMI's ANSI MH16.1 standard calls for, according to a summary by rack engineering firm Damotech. Ask the municipality whether racks need a permit.
• Forklifts. Purchase or lease, plus maintenance, parts and fuel or charging. OSHA also requires employers to ensure each operator is trained and evaluated.
• Charging areas. OSHA's forklift rule requires charging installations to be in designated areas with provisions for flushing and neutralizing spilled electrolyte, fire protection, protecting chargers from trucks, and ventilation. That can mean build-out work.
• Dock upgrades. Levelers, seals and bumpers may need adding or repair, depending on the building.
• Power and other tenant improvements. If the building lacks what you need, someone pays for it. LeasePilot, a lease software company, recommends that the lease spell out who pays for utility infrastructure improvements.

Storage plans can trigger costs that do not appear on any listing.

• High-piled storage review. The City of Madison, Wisconsin, as one example, requires a work permit in existing buildings so it can verify that fire protection matches the storage arrangement. Other jurisdictions have their own rules, and your fire official decides what applies.
• Sprinkler changes. Taller racks or a different product mix can raise questions about whether the system is adequate. Your engineer, insurer and fire official settle that, and the cost could be significant.
• Your own insurance. Leases often require coverage, and LeasePilot notes that pollution coverage is often excluded from standard policies. Ask your insurance broker to price the policies against your actual use.
• Environmental. If you handle hazardous materials, budget for assessment, compliance and legal review.

1. Get proposals in the same format, with base rent, escalations and estimated pass-throughs, along with free rent and landlord allowances.
2. Request several years of expense reconciliations and tax bills, plus utility history if you can get it.
3. Have a contractor inspect HVAC, roof and dock equipment and estimate near-term repairs.
4. Price racking, forklifts, charging, power, office work and moving as one-time costs, and spread them over the term.
5. Add insurance, security, permits and any annual fire or rack inspections.
6. Estimate restoration at exit, including rack removal, floor repair and any required return of the premises to its original condition.
7. Divide the total by the term to get a yearly figure, and compare buildings on that basis.

Tenant Advisory Group represents tenants and buyers. We put every option into the same total occupancy cost model, so a building with a low rate and a heavy repair burden can be compared fairly with one that costs more per foot and less to run. Your CPA should review how the lease and any improvements will be treated in your financial statements.