Warehouse
How to Negotiate a Warehouse Tenant Improvement Budget
- Written by Catherine Lux
Moving to a new warehouse is a significant milestone for any ecommerce business. Earlier this year, I had the privilege of visiting one of Veeqo's sellers as they moved to their very first warehouse, to find out more about their process and get some tips and advice for other sellers.
Toy retailer eChapps had been running their $8.5million business from their family home and 25 storage units in Virginia, and were not only moving to their first warehouse, but also moving states.
Their new, 20,000 sq ft warehouse was located 350 miles away in South Carolina, so I hopped in a car and followed them down as they moved the business to the new location.
One of the biggest pieces of warehouse moving advice they wanted to give other sellers, is to properly negotiate a tenant improvement budget. The mistakes they made with negotiating their own tenant improvement budget is the main thing they regret from the move, and so they were keen to pass on some tips to ensure other sellers don't make the same mistakes.
If you've found a new warehouse to lease, negotiating a tenant improvement (TI) budget is the next critical aspect of the process.
Tenant improvements are essential customizations that make the warehouse suitable for your specific needs, and help keep your moving costs as low as possible.
Further reading: Should you rent or buy a warehouse?
In this guide we'll cover eChapps' top tips on how to negotiate a tenant improvement budget effectively, ensuring your new space supports your business goals.
Table of Contents
Understanding Tenant Improvements (TIs)
Assessing Your Needs
Researching the Market
Engage a Commercial Real Estate Broker
The Negotiation Process - Step-by-Step
Project Managing the Tenant Improvement Work
Understanding Tenant Improvements (TIs)
Tenant improvements, also known as leasehold improvements, refer to modifications made to a rental space to meet the specific needs of a tenant.
In a warehouse setting, TIs can include the construction of office space, installation of loading docks, upgrading HVAC systems, setting up shelving and racking systems, and implementing security measures.
One thing eChapps did, is get LED lighting fitted before they moved in, to make the warehouse more environmentally friendly, and help lower their electricity costs. The upgraded lighting was paid for by the landlord because it was in their tenant improvement budget.
These types of improvements are vital for ecommerce businesses because they directly impact the efficiency of operations, employee productivity, and overall business performance.
By negotiating a robust TI budget, you can customize the warehouse to fit your exact requirements, facilitating smoother business operations.
Just make sure it's all written down in the contract before signing the lease, and be very specific in the contract about what is and isn't included!
Assessing Your Needs
Before entering negotiations, conduct a thorough needs assessment to identify what improvements are essential for your business.
Take your time and have a really good look around the warehouse. Take measurements of everything as real estate plans can often be inaccurate, and consider both your current operations and future growth plans.
Ben Chappell, CEO and co-founder of eChapps, said his biggest regret is not being nosy when viewing the warehouse. One piece of advice he gave was, “don't be afraid to be nosy when checking out warehouses. I did feel very invasive, but one thing I wish I did was take more measurements while I was there checking out warehouses. Even though there's gonna be people working most of the time, really just get in there. Look behind pallets, look behind racks, see what holes are there!"
He pointed out that not being nosy and not knowing much about tenant improvement plans, meant they didn't get as big of an improvement budget as they could have got, so they ended up having to pay for certain things themselves. “When we first got this warehouse, we were making a list of improvements that needed to be done. And so when we were writing the contract in the lease, that's all things that I wish I would have known more of so I could have gotten a bigger tenant improvement budget - so that's less money out of our pockets and more out of the landlords.”
When assessing your needs, you'll also need to analyze your inventory management, shipping processes, and employee workspace needs. Determine what modifications are necessary to optimize these areas.
Further reading: How to Design Your Warehouse Layout for Maximum Efficiency
You'll then need to involve key stakeholders from operations, logistics, and finance departments (if you have them) to get a comprehensive understanding of your requirements.
Then, create a list of improvements categorized into "essential" and "desirable." This will help you prioritize during negotiations.
As an example, a business who sells beauty products might need additional loading docks to handle high shipping volumes, a climate-controlled area for temperature-sensitive items, and an expanded office area for customer service operations.
Researching the Market
Understanding the local warehouse market conditions is crucial for effective negotiation. Make sure to research the following:
Supply and Demand Dynamics: Know the availability of warehouse spaces and the demand in your desired location. A high supply with low demand may give you an upper hand in negotiations.
Typical TI Budgets: Find out the standard TI budgets offered by landlords in the area. This will give you a benchmark for your negotiations.
Carrying out market research will strengthen your position, by providing data-driven insights into what you can reasonably expect and ask for in terms of a TI budget.
Engage a Commercial Real Estate Broker
An experienced commercial real estate broker can bring that expertise and market knowledge to the table. And not only can they offer valuable data on market conditions and typical lease terms, but they can also negotiate on your behalf.
Ben says you need to pick one that “you're comfortable asking lots of questions to.”
He went on to say, “My guy, he led us through this process from start to finish from having zero experience with renting out commercial and industrial places. He was able to guide us along the right path and led us to ask questions to building owners and landlords that we would have never have thought to ask.”
Make sure to leverage their experience to secure the best possible TI budget, and make sure you choose a broker with experience in warehouse leases and a strong track record in negotiations.
The Negotiation Process - Step-by-Step
When you're ready, it's time to negotiate. Preparation really is key to successful negotiations, so ensure you have all necessary documentation and data ready, including your business financials, growth projections, and a detailed list of required improvements.
Initial Contact: Make a strong first impression with potential landlords by clearly communicating your business needs and TI requirements. This sets the stage for productive negotiations.
Understanding the Landlord’s Perspective: Recognize the landlord’s constraints and motivations. A win-win scenario increases the likelihood of favorable terms.
Phased TI Allowances: Negotiate for phased TI allowances, which can provide flexibility and reduce upfront costs.
Flexibility in Scope and Timeline: Ask for flexibility in the scope and timeline of improvements to accommodate unforeseen needs.
Contingency Clauses: Include contingency clauses in the lease for unexpected expenses that may arise during the improvement process.
Get legal advice: Consult legal and financial advisors to ensure lease agreements and TI provisions are favorable and legally sound. They can review the lease terms to make sure all negotiated points are clearly documented, and also provide advise on any financial implications.
Finalize the Lease Agreement: Carefully review the lease terms and TI provisions, and make sure all negotiated points are clearly documented to avoid future disputes.
This final point to carefully review the lease terms before signing, is probably the most important, as Ben experienced after they had signed theirs and moved into the warehouse.
He said even though he had asked the landlord to change all of the lights to LEDs, they actually ended up with a couple of sections that weren’t changed to LEDs, and it turned out that the sections in question weren't actually in the TI budget and plan.
He said that because it wasn’t written down in the lease agreement, “if we wanted them to be LEDs, that comes out of our pockets now, rather than just the landlord's tenant improvement budget. So make sure to ask lots of questions, clarify everything. Don't assume they want to do it the same way you wanna do it.”
Project Managing the Improvement Work
When it comes to project managing the tenant improvement work, establish clear timelines and milestones for the improvement work, and regularly communicate with the landlord and contractors to ensure the project stays on track.
Ben says, "Make sure to ask, ask and ask again about contractors. Don't assume that they're gonna do something that is not written down.”
Secure a TI Budget That Supports Your Business
Negotiating a tenant improvement budget is a critical step when leasing a warehouse for your ecommerce business. Learn from the mistakes of sellers like Ben who have done this before, and invest the right time and effort into these negotiations to really maximise your TI budget.
Find out more about eChapps' success with Veeqo, Amazon's powerful suite of shipping and inventory management tools.
