Prologis COO Larry Harmsen charts the ways in which his company’s recently introduced program addresses the normally cumbersome annual reconciliations aspect of leasing in this EXCLUSIVE commentary.
The words “simple” and “predictable” are not usually associated with a commercial real estate lease. Few consider lease terms a focal point for improving the customer experience. Instead, landlords and tenants battle over clauses and hammer out maintenance and expense obligations in an adversarial fashion.
It doesn’t have to be this way. Considering the lease is essential to the business relationship, shouldn’t it alleviate these significant customer pain points?
At Prologis, we are pioneering a new approach, one that goes beyond good location, fair market rent and standard features to address one of the most cumbersome aspects of leasing real estate: annual reconciliations. We’ve overhauled the standard triple net (NNN) lease to create a simplified document with cost certainty through the entire lease term. The result is our new Clear LeaseTM , which was launched in the third quarter of 2017.
The current NNN leasing model has two significant flaws. NNN leases include a myriad of exceptions, conditions and contingencies relative to landlord and tenant obligations for repairs, capital expenses, property insurance and Common Area Maintenance (CAM). This makes them needlessly long and dense with legal jargon—some industrial leases exceed 60 pages. In addition, NNN leases erode trust by requiring annual year-end operating expense reconciliations that often result in additional payments by the customer.
Clear LeaseTM is an alternative that fixes all capital and operating expenses, except real estate taxes, for the lease term. A streamlined 11 pages, it simplifies negotiation, reduces the need for attorney time and eliminates expense surprises and the associated time-consuming and conflict-ridden annual reconciliations.
In conversations with our customers and our leasing and property management teams, we heard their desire for us to preserve ourstandards for maintenance and service levels while adding predictability and cost certainty. Given this new approach in industrial real estate, we knew some might think fixed expenses would be padded to our benefit or that we might dial back on our maintenance and service standards to find cost savings. We won’t do that. Such actions would chip away at the trust we’ve built with our customers over the long term.
In addition, given our scale, it’s not necessary. With historical expense data and local market expertise, we can confidently forecast annual expenses and give customers insight into the process. While operating expenses and capital repairs vary from property to property, as a long-term owner/operator with a portfolio that spans 687 million square feet and 3,300 buildings in 19 countries, we have the scale to absorb occasional variances at the property level.
As we developed Clear LeaseTM , a question kept cropping up from customers and brokers: Could we include office HVAC for a truly inclusive fixed operating cost to the customer? Commonly, across NNN leases in industrial real estate, the customer is responsible for maintaining and replacing the HVAC system by contracting directly with a local service provider. Recognizing the challenge for our customers to maintain this equipment with efficiency and cost-effectiveness allowed us to include HVAC in our Clear LeaseTM .
Smart businesses know that innovation and daily dialogue with customers are the keys to success. It’s no different in industrial real estate. Our experience with Clear LeaseTM shows that customers and brokers have been wanting this type of change.
By: Larry Harmsen (GlobeSt)
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