Once you close on an industrial property, your next objective is to lease the vacant spaces. If you are acquiring an occupied building, your goal is to evaluate whether the inherited leases support or hinder your investment business plan.
Commercial leasing is actually pretty straightforward once you get past the initial learning curve, but you still have to make a few key structural decisions that will compound over time.
Utilize standard lease contracts
Just like the purchase process, you should always use standard lease contracts rather than custom drafting. I mainly operate in California, and a lot of people here use standard forms published by AirCRE. These templates are professionally drafted, legally tested, and highly familiar to commercial brokers and tenants. Because both parties understand what the standard document contains, negotiations proceed quickly and legal review fees remain low.
If you need to customize terms (such as specifying a tenant improvement allowance or a customized rent schedule), you handle these details through a simple one-page addendum attached to the standard contract. You do not rewrite the underlying lease agreement.
The three key lease terms to target
Within the standard lease structure, you should focus your negotiations on these three variables:
Initial Lease Term (3 to 5 Years): A longer initial term provides stable income and a clean underwriting story when refinancing. Commercial lenders want to see durable, predictable rental income. A tenant whose lease expires in two months represents a much higher risk profile than one locked in for four years. Aim for a minimum of three years on any new lease; five years is ideal.
Annual Rent Increases (3 Percent): This is the standard industrial market rate, and tenants expect it. It protects your income against inflation and increases your property value automatically. For example, if a tenant starts at $8,000 per month, a 3 percent annual escalation increases their rent to approximately $9,004 per month by year five without renegotiating. Across a multi-tenant building, these annual rent bumps significantly increase your stabilized Net Operating Income (NOI).
Renewal Options: It is standard practice to offer tenants options to extend their lease. However, you must structure the renewal rate carefully. A tenant with a renewal option locked in at a rate set years ago can cap your upside if market rents have moved. When signing a new lease, always structure renewal options to reset to the current market rate at the time of renewal.
What to verify when buying an occupied building
If you are purchasing a property with tenants in place, you must review the actual physical leases during your due diligence period. Do not rely solely on the broker's rent roll summary.
You must identify:
Exact lease expiration dates.
Existing tenant renewal options and how their rates are calculated.
Any side agreements or rent concessions.
An expiring lease represents either an immediate opportunity to reset rents to market rates or a vacancy risk during your stabilization phase. Below-market renewal options represent a similar trade-off: the tenant is a stable, known quantity, but you are locked into a below-market rate. You must find these details in the actual lease documents.
The Concrete Returns Playbook outlines my entire leasing process, including the templates I use to track leases and calculate rental escalations.
Javi