Your warehouse has been on the market for a few weeks, and two offers arrive in the same week.
One offers a higher rental per square metre. The other is lower, but from a different kind of tenant on different terms.
The natural reaction is to accept the higher rental. Often, that is the wrong decision.
A lease offer is not a single number. It is a package of rental, escalation, incentives, timing, lease term, security and tenant quality, and the headline rental is only one part of it.
What Actually Makes an Offer Strong
Before comparing offers, separate each one into the terms that determine what you will actually receive.
| Term | What to look at |
|---|---|
| Rental | Rate per m², and whether it covers the whole building, including offices, mezzanines and yard |
| Escalation | Annual rate, and whether it is fixed for the full term |
| Lease term | How long the income is secured, and any early termination rights |
| Rent-free period | How many months, and whether the tenant still pays operating costs during it |
| Landlord contribution | Fit-out, office upgrades, power, repairs or other work you are asked to fund |
| Commencement date | How long the building stays vacant before the lease starts |
| Deposit or guarantee | Amount, form (cash or bank guarantee) and whether it matches the risk |
| Tenant covenant | Trading history, financial strength, suretyship and the nature of the operation |
| Conditions | Approvals, finance, zoning, power upgrades or other conditions that could delay or cancel the deal |
| Use of the building | Whether the intended activity suits the property, its zoning and its fire and power capacity |
A Worked Example
The figures below are illustrative assumptions, not market data. Replace them with your own.
A landlord has a vacant 2,500 m² warehouse and receives two offers.
| Offer A | Offer B | |
|---|---|---|
| Rental | R80/m² (R200,000 per month) | R74/m² (R185,000 per month) |
| Escalation | 8% per year | 7% per year |
| Lease term | 3 years | 5 years |
| Rent-free | 2 months | 1 month |
| Landlord-funded fit-out | R600,000 office upgrade | None |
| Lease starts | In 3 months | Next month |
| Deposit | 1 month | 3 months |
| Tenant | Newly established business | Established distributor with financial statements |
On rental and escalation alone, Offer A looks clearly stronger.
What each offer delivers over the next three years
To compare fairly, look at the same three-year period from today for both offers. Assume the landlord carries holding costs of R45,000 per month (rates, security, insurance and maintenance) while the building stands empty.
| Offer A | Offer B | |
|---|---|---|
| Months vacant before the lease starts | 3 | 1 |
| Rental received over three years | R6.69 million | R6.74 million |
| Less landlord-funded fit-out | –R600,000 | – |
| Less holding costs while vacant | –R135,000 | –R45,000 |
| Net income over three years | R5.96 million | R6.70 million |
| Effective rental per m² per month | R66.18 | R74.39 |
Offer B delivers roughly R739,000 more over three years, despite its lower rental and lower escalation.
The comparison also stops at three years. At that point Offer A's lease ends and the landlord faces another vacancy, another letting process and possibly another round of incentives. Offer B still has two years to run, with a tenant who has a stronger financial record and a larger deposit.
That does not make Offer A unacceptable. It means its headline rental needs to be weighed against the incentives, timing, term and risk that come with it.
Look Beyond the Numbers
Some of the most important differences between offers do not appear in a cash-flow table.
Tenant quality
A higher rental from a tenant with no trading history carries more risk than a slightly lower rental from an established business. Ask for financial statements, trading history, references and suretyship where appropriate, and consider what happens to your income if the tenant fails in year two.
Fit for the building
A tenant whose operation suits the property is more likely to stay. A tenant who needs significant changes to power, layout, fire protection or yard use may cost more to accommodate and be more likely to leave at the end of the term.
Conditions and certainty
An offer conditional on finance, a power upgrade, zoning approval or a board decision is weaker than an unconditional offer, even at a higher rental. Every condition is a reason the deal might not proceed while your building stays vacant.
Effect on the property's value
For investment property, the lease affects what the building is worth. A longer lease with a strong tenant usually supports a higher value than a short lease with a weaker tenant, which matters if you plan to sell or refinance.
Questions to Ask Before You Accept
- What is the effective rental after rent-free periods and landlord contributions?
- How long will the building stay vacant before income starts?
- How long is the income secured, and what happens at the end of the term?
- How strong is the tenant, and what security is offered?
- Are there conditions that could delay or cancel the deal?
- Does the tenant's operation suit the building, its power, zoning and fire compliance?
- What will the landlord need to fund or repair before occupation?
- How does each offer affect the value of the property?
Choose the Offer, Not Only the Rental
The strongest offer is the one that delivers the most secure income over time, from a tenant who suits the building, with the fewest risks attached.
A higher rental is a good reason to look closely at an offer. It is not, on its own, a reason to accept it.
If you have received one or more offers on your industrial property, you can ask for a review of the offers before you respond, or discuss your letting strategy before the next offer arrives. If you need the property let or sold, Mendace Properties can manage the marketing, negotiation and transaction.
Occupiers comparing their own options may also find our guide to renewing or relocating your industrial premises useful.
This article provides general information and does not constitute legal, tax, financial or valuation advice. The worked example uses illustrative assumptions; actual outcomes depend on the property, lease terms and tenant.