Watch Out! Current Hazards in Industrial Real Estate Transactions

As if finding available industrial real estate wasn’t challenging enough, we put together this list of concerns which could become hazards if they are not addressed in industrial real estate transactions. We encourage all principals and third party service providers to address these issues on the front end of transactions because they are much more costly after contractual relationships are created or other unfortunate events take place.

Delay in Possession

We encourage tenants to investigate whether there are any barriers to the landlord meeting a possession date under the LOI or lease. Barriers such as a current tenant’s ability to move out on time and a landlord’s tenant improvements can create major delays to possession. Although typically covered under a lease, delays in possession can create significant operational costs that may far exceed any legal rights under the lease. Often these legal rights are limited to the ability for a tenant to terminate the lease after a certain period of time, hardly a good solution if you still need the space!

With vacancy at historically low levels, today it is common for a tenant to execute a lease for a space that is occupied by another tenant. The new tenant’s expectation may be that the space will be delivered on or before the commencement date. However, we have seen a number of delay in possession scenarios where the current tenant goes into holdover, sometimes for months. This trend has created a domino effect in certain markets where the expected availability of spaces gets delayed for weeks, if not months.

It is therefore important that prospective tenants determine the likelihood of holdover by the current tenant if their desired new space is occupied. They should also expect their prospective landlords to work with them to understand any risks to occupancy prior to signing a lease.

Fire Sprinkler Systems

We encourage occupiers to investigate their sprinkler system requirements before looking at available spaces in order to save time and money. We also encourage landlords and tenant brokers to proactively ask prospective tenants whether they have satisfied their high pile permit requirements in reference to the subject building prior to drafting leases.

The National Fire Protection Association (NFPA) creates codes and standards which are incorporated into municipal fire department high pile permit codes. NFPA 13, Standard for the Installation of Sprinkler Systems and NFPA 30, Flammable and Combustible Liquids Code were updated in 2016 and 2018 respectively. A update to NFPA 13 is due out in September 2018.

The mistake we often see is an occupier relying on the sprinkler requirements from a previous high pile permit to guide sprinkler requirements for a new facility. As mentioned above, fire codes change and therefore sprinkler requirements change even for identical storage commodities and racking plans.

Accessibility

As part of the lease negotiations or, in the event of a purchase for a buyer, its due diligence, tenants/buyers and landlords should understand state and federal accessibility standards in place and how they may or may not affect their liabilities in the future. As with fire protection codes, accessibility standards and how they apply have changed over time and may vary by locale-especially in relation to potential liabilities for non-compliance.

The federal civil rights law underpinning most accessibility standards is The Americans with Disabilities Act of 1990 (ADA), which prohibits discrimination of individuals with disabilities and requires all facilities used by the public to be accessible to individuals with disabilities. ADA standards are based upon the age of the facility or date of renovations. To see more detail on this, feel free to visit this website.

We encourage tenants and landlords to work with their legal professionals to understand any future liabilities from ADA non-compliance under a lease. Although industrial properties are less likely than some other property types to be the subject of an ADA lawsuit, ADA liabilities can still be triggered by other ways such as tenant improvement permits. At the very least, leases should outline each parties liabilities should any ADA or other accessibility standard requirements be deficient. In addition, some tenant and landlords will hire a Certified Access Specialist (CASp) in order to evaluate any ADA or accessibility issues under a lease. Such inspections may also reduce liabilities such as statutory damages and provide confirmation that the parties have the intent to be compliant.

Entitlements

Finally, occupiers should always obtain a business license or make sure their use is approved prior to signing a lease or waiving any contingencies to purchase a property. As with fire codes, use codes can change and relying on industrial zoning does not ensure that an industrial use will be approved.

We always encourage occupiers to get written approval, via a business license or use verification letter, that their use is approved. Verbal conversations with City personnel or online searches of municipal codes should not be considered sufficient to sign legal obligations.

 

Published by

Chuck Berger

I partner with industrial companies to develop real estate strategies and solve real estate challenges. Based in Orange County, California, USA. Find me on Twitter @chuckberger and on LinkedIn at www.linkedin.com/in/chuckberger

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