Page 32 - Food&Drink Magazine October 2021

PLANT DESIGN & FITOUT
Time to move?
Is it time to acquire a new manufacturing facility or renegotiate terms for an existing facility? Dylan O’Donnell from property advisory firm Lpc Cresa details the essential ingredients for a successful commercial lease negotiation.
THE manufacturing sector has historically seen a higher proportion of owner-occupiers than other sectors, but a well-structured commercial lease agreement can provide a manufacturing business with the right balance of long-term security of tenure and the flexibility to meet fast-evolving demands of consumers, while not tying up capital needed to invest in new technologies and product innovation. Further, landlord incentives can help manufacturing businesses access additional capital needed to invest in new plant and equipment.
Firstly, let’s look at some common mistakes manufacturers should avoid when establishing the right context for a commercial lease negotiation to take place.
The most common mistake is leaving insufficient time. A sufficient timeframe for a commercial lease negotiation should take into consideration the size and complexity of the facility as well as prevailing local market conditions.
An insufficient timeframe for a lease negotiation always leads to compromises and avoidable costs.
The second common mistake is not having a clear desired outcome in mind in relation to our five key areas of focus.
Too many businesses focus purely on occupancy cost from the outset of negotiations and only attempt to achieve other important requirements (in relation to, say future flexibility or specific obligations) when both parties are essentially already committed to a lease and finalising lease documentation.
A third common mistake is not aligning a facility’s lease expiry with expected lifecycle of capital-intensive plant and equipment or, for businesses with multiple facilities, lease expiry dates or right of early termination dates with other relevant facilities that may present opportunities to consolidate operations.
This is particularly pertinent for the hundreds of manufacturing businesses
currently benefiting from government grants to invest in new technologies or plant and equipment that have an opportunity to consolidate business operations or renegotiate lease terms to align with the lifecycle of that plant and equipment.
When the right context for a lease negotiation exists, we are far more likely to achieve desired outcomes.
Following the execution of a location strategy and site selection process, we always have five key areas of focus when representing a business in a commercial lease negotiation. These make up our essential ingredients for a successful business outcome.
ESSENTIAL INGREDIENTS
• Cost: Favourable occupancy costs to the business
• Risk: Appropriate sharing of risks between the business and its landlord
• Flexibility: Conditions that enable future business growth or consolidation
• Obligations: Clear and contained obligations for the business
• Guarantees: Mutual guarantees, proportionate to the level of risk assumed by both parties
Here are just some items that should be considered to determine whether a successful outcome has been achieved in each of the five key areas.
abatement is also critical. Too many businesses pay a premium by relying on representations from owners and their agents about market rent, outgoings and incentives and by not running a thorough competitive process to determine a true market value. But due diligence in these areas alone will only tell part of the story – there are often also hidden costs in a commercial lease that most businesses are not even aware they could have avoided.
These costs might be incurred from an ambiguous make good provision, an onerous redecoration provision, excessive requirements for a bank guarantee, acceptance of a ‘ratchet’ or ‘collar’ provision that limits a decrease in rent at market rent review, unfavourable rent adjustments, lack of attention to inclusions in outgoings or acceptance of a gross lease with ‘base year’ outgoings to name just a few.
RISK
When a commercial lease is executed, both the tenant and the landlord have signed up to a level of risk and in an ideal outcome there should be an appropriate level of risk-sharing. Historically, however, the transfer of risk has weighed heavily in favour of the landlord
A well-structured commercial lease agreement can provide the right balance of long-term security and flexibility to meet fast-evolving demands.
“ Too often, a one-size-fits all approach is adopted without due consideration to the level of risk.”
32 | Food&Drink business | October 2021 | www.foodanddrinkbusiness.com.au
Lpc Cresa’s Dylan O’Donnell: having an informed position is key in lease negotiations.
COST
Thorough due diligence on asking rent, outgoings and incentives is critical to a successful outcome. An optimal structure of landlord incentive as up-front capital contribution to fitout, plant and equipment versus rent-free period or rent