Commercial real estate has always been a great bargain for investors, but recently they have been moving away from investing in the geese that lay golden eggs, which shopping centers and office buildings were usually perceived to be, and investing their assets in warehouse properties. There are certainly many reasons for such a situation, but the events of the last several months cannot be left without comment – the COVID-19 epidemic not only deprived shopping centers of part of the revenue from lease agreements, but also the uncertainty as to the further fate of the epidemic and the financial condition of tenants, reduced the guarantee of return on investment. What hit the shopping centers, drove the warehouse market – e-commerce and demand for space (Small Business Units are particularly attractive in this context), high rate of return and lower investment costs compared to e.g. shopping centers. – all this effectively attracts Polish and global capital. This article focuses on the popular trend in the market of expanding warehouse parks.
Expansion can consist of adding new warehouses as well as extending existing buildings. The regulations do not provide a clear answer to the question of what an expansion of a building structure actually is. However, referring to the case law, we will learn that the expansion is an enlargement, extension of a structure, already built-up area, addition of new elements. Such a broad interpretation of the regulations makes it virtually certain that any attempt to expand a warehouse will require a building permit, just like constructing a building from scratch.
As part of a planned investment, the first thing to check is whether a local spatial development plan (LSDP) has been adopted for the area where the property is located and whether it allows for the scope of works planned by us. If so, the matter is quite simple – after fulfilling the statutory conditions, on the basis of the LSDP the investor applies for a building permit. This situation is most often encountered in the case of urban warehouses, although it should be borne in mind that only about 30% of Poland’s area has been covered by a local spatial development plan.
Things get more complicated if the property is not included in the LSDP (which is the case in most non-urban areas). In such a case, you must first apply for a zoning decision, and only on its basis apply for a building permit. This process will be more time-consuming than the process of obtaining a building permit based on the LSDP described in the previous paragraph, however, even in this case the investment can be successfully implemented. It is worth mentioning that not only the owner of the land, but also an entity interested in its purchase may apply for the issuance of a zoning decision – in this way it is easy to assess whether a potential investment can take place and whether the land is worth buying. This is important when an investor is interested in expanding the park into adjacent parcels.
In the context of permits, it is worth bearing in mind the form in which the investor acquires the property. If the investor purchased the real estate through an asset deal (land purchase transaction) – he does not benefit from the so-called universal succession, so he must ensure that the existing permits concerning the real estate are transferred to him (e.g. zoning decision). It is different in case of acquisition through a share deal, i.e. purchase of a company owning a real estate – here the investor becomes a party to all previous decisions issued in favour of the previous owner (e.g. purchase of a real estate with an already issued zoning decision shortens the investment time as the investor can immediately apply for a building permit).
General contractor and construction contract
After obtaining the necessary permits, the next step to start the investment is to select a general contractor and conclude a construction contract with him. Careful selection of a general contractor and a good construction contract can save an investor from a number of problems, including the biggest one – the risk of the contractor leaving the construction site. Above all, you should make sure that the general contractor is a financially stable entity and provides adequate security for the performance of the contract. An entity providing warranty of proper performance of the investment is one thing. You should also take care of the content of the contract between the parties – it is well known that the contract is written for bad times, not for good.
Among the means of securing the general contractor’s performance are primarily bank guarantees. The higher the security amount, the better for the investor, of course. A bank guarantee is the safest security measure; do not choose to enter into a contract with an entity that insists on providing only an insurance guarantee. Enforcement of a bank guarantee is independent of contractual provisions (the bank cannot evade payment by invoking the contract), and of the contractor’s situation (e.g. bankruptcy), and thus gives the investor a great sense of security and enforceability of the amounts due to him, e.g. under contractual penalties.
It is also worth regulating the issue of settlements in such a way as to make payments for specific, completed stages of the work. Thanks to this solution, the investor reduces the danger of spending funds allocated for work that will not actually be performed.
In addition, in order to protect own interests, it would be advisable to provide for grounds for termination in the contract that would allow the contractor to be quickly removed from the construction site in the event of problems, including, in particular, financial problems. Bankruptcy law prohibits the severance of contracts in the event of the declaration of bankruptcy or the filing of a bankruptcy petition, so ongoing monitoring of construction progress, as well as attention to claims management issues, is important.
What about existing tenants?
Imagine a situation in which you are a tenant of several thousand square meters of a warehouse. The building next door has begun the expansion process, and the landlord has begun construction of a new warehouse on the adjacent plot. Noise, difficult access to the warehouse, power outages and contamination of the plot around our building are everyday occurrences. Sounds like an upcoming tenant claim…?
Prior to any construction that may adversely affect the use of the leased property by existing tenants of buildings around the development, their leases would need to be audited. Tenants, in addition to claims under mandatory law, such as termination for defects that endanger life or health, are usually entitled to contractual claims for limited or impeded use of the premises, such as rent reduction, contractual penalties, or in the worst case, the right to terminate the contract.
Already at the stage of investment planning, it is worth to manage this risk, to include the potential value of such claims in the investment costs. It may also be a good idea to enter into additional agreements or annexes to contracts with tenants, even before construction begins, to limit potential claims and reduce risk on the part of the landlord.
However, the expansion of the logistic park itself may also bring benefits to the existing tenants – in connection with the increase in gross lettable area (GLA), their share in common costs, usually calculated according to the proportion of the subject of the lease in relation to the entire GLA, will decrease, and therefore the annual service charge may decrease.
The last several months have seen a specific boom in the warehouse investment market. Currently in Poland there is about 22 million square meters of warehouse space, but this space still does not meet the needs of the market. With the current demand for storage space, it is certain that many property owners will choose to expand their existing buildings or add more. There are various risks associated with an investment of this scale – some of which, with the help of good advisors, can be mitigated already at the preparatory stage.
The authors of the text are Magdalena Wierzbicka-Zagrajek and Sławomir Lisiecki. The article was published in Eurologistics magazine on January 11, 2022 (written in Polish).