How common is it to renegotiate warehouse leases during due diligence? And how common is it to put a property under contract while only intending to close IF someone is able to renegotiate and extend leases? Not saying I would try to be discrete about this as a buyer... more so wondering if sellers ever have an appetite to allow potential buyers the chance to extend leases before closing.
Some background here- I'm a new industrial investor who is in fairly deep talks to acquire a small warehouse. It has two tenants occupying 6,000 sq ft total. They have 2 years remaining on their current leases, and this deal would be much more desirable to me if I was able to extend those leases each by a few years.
What are your thoughts? What other details, if any, have I failed to consider?
Investor · Orlando · Member since 2020 · 96 posts · 31 votes
5y
Hi @Ryan Aurand I was in this exact situation a few weeks ago. I was under contract on a small office building that was 50% occupied with a tenant that had one year remaining on their five year lease. They also had five 1 year renewal options with 4% annual escalations. The listing broker assured me the tenant was not going anywhere but I couldn't take the chance of the building being 100% vacant so I asked the broker to propose to the tenant that if they were to extend for five years I would hold their rate fixed at a lower rate than what they were currently paying. I also offered two months free rent up front. Broker said Seller wouldn't allow him to make the offer until my deposit went hard. His concern was that if I backed out of the deal then the tenant would ask for the same deal from the Seller. Ultimately the tenant had a ROFR and decided to exercise it. But if they didn't I probably would have backed out of the deal.
Investor · Orlando · Member since 2020 · 96 posts · 31 votes
5y
This is the first time I ever tried that but I’m sure I wasn’t the first and won’t be the last.
For you I guess it depends on how juicy your deal is and how quickly you think you could lease it up. Is it a strong market for small bay industrial users? Can you buy it low enough to where you could lease it below market and still get a decent annual return?