Should Your Third Party Warehousing Provider Hold the Lease?
By Robert G. (Gary) Bender on Feb 1, 2017
Historically, companies have outsourced their warehousing to Third Party Warehousing Providers (3PLs) who have held the lease. On the surface, this seems like the simple solution to streamline the process and write just one check for storage and handling. However, there are many advantages to companies holding the lease when hiring a 3PL Provider to operate their warehouse. We have noted the top three (3) economic benefits for companies holding the lease:
- Free Rent – When you hold the lease, any negotiated free rental period accrues to your benefit. If you enter into a Logistics Services Agreement and do not hold the lease, the free rent accrues to the benefit of the 3PL provider.
- Tax Incentives – If your 3PL provider received economic incentives associated with the lease or purchase of the warehouse building (particularly property tax incentives), once again, these benefits accrue to the benefit of the 3PL provider. Many 3PL Providers charge their clients storage fees based on a full rental value (or the Base Rent plus all Operating Expenses inclusive of Taxes), even though they are not paying the full rental value because of the abatement they are receiving on the property taxes. Many 3PL providers do not pass on the tax incentive savings to their client and instead, charge their clients storage charges as though these tax incentives did not exist.
- Discretionary Allowance— When your company holds the Lease, on top of the Tenant Improvement Allowance for the construction of office space, fully equipped dock packages and other building improvement items, you can often negotiate for a Discretionary Tenant Improvement Allowance. The Discretionary Tenant Improvement Allowance is beneficial in that it can provide money for non-standard Tenant Improvements such as security systems and ceiling fans while often providing money for racking, material handling equipment or placards. Generally, if the full Discretionary Tenant Improvement Allowance is not utilized, the Tenant can use the surplus funds to offset rent.
There are many additional advantages for companies willing to hold the lease. To learn more about these advantages and why holding the lease puts you in a much stronger negotiating position, schedule your free 3PL Compete consultation.