A mezzanine is cheap per square metre and expensive per year when the lease is short. The remaining term decides it.
It pays when its cost, spread over the years left on the lease, comes in below the all-in cost of the extra space it replaces. On an illustrative 3,000 m² mezzanine costing 1,200,000, an occupier with eight years left pays 93.49 per m² a year, against 135.00 for space in a second building once the shuttle between the two is counted. The answer turns on the lease: below 4.51 years remaining the mezzanine loses, and against space next door with no shuttle it needs 7.78.
Worked in full in Logistics and Industrial Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A fulfilment occupier in a 12 m clear warehouse runs out of pick-and-pack space. It can build a mezzanine over part of the floor, which uses height it already pays for, or take more space. Mezzanines are cheap per square metre compared with a building, but the occupier usually funds them, and its money has to come back over a lease that may be shorter than the deck's life. The comparison must be made per usable square metre per year, on the same basis for both options. Every figure below is illustrative.
| Input | Value |
|---|---|
| Mezzanine deck area, m² | 3,000 |
| Structure, deck, stairs and handrails, per m² | 350 |
| Sprinklers, fire protection, lighting, pallet gate | 150,000 |
| Removal and making good at lease end | 60,000 |
| Running cost per m² a year | 10 |
| Property tax on the added floor area, per m² a year | 12 |
| Years left on the lease | 8 |
| Occupier's discount rate | 8% |
| Second building: rent per m² | 75 |
| Second building: service charge, tax, insurance per m² | 20 |
| Shuttling stock between buildings, a year | 120,000 |
Whether a mezzanine adds taxable floor area, and whether it needs consent, depends on the jurisdiction and its use. The 12 per m² is a placeholder for whatever local property tax applies.
Capital = area × deck rate + fire and lighting; plus reinstatement discounted from lease end
Annual capital cost = capital ÷ annuity factor, where annuity factor = (1 − (1 + r)−n) ÷ r
Mezzanine cost a year = annual capital cost + (running cost + property tax) × area
Excel: =PMT(8%,8,-(1200000+60000/(1+8%)^8))+3000*(10+12)
Step 1, capital. 3,000 × 350 = 1,050,000, plus 150,000 of fire and lighting: 1,200,000, or 400 per m². Reinstatement of 60,000 in year 8 is worth 32,416 today, so the capital to recover is 1,232,416.
Step 2, spread it over the lease. At 8 per cent over 8 years the annuity factor is 5.7466. 1,232,416 ÷ 5.7466 = 214,458 a year.
Step 3, add running costs. (10 + 12) × 3,000 = 66,000. Total 280,458 a year, or 93.49 per m².
Step 4, the alternative. 3,000 m² in a second building at 75 of rent and 20 of outgoings is 285,000, or 95.00 per m². Running two buildings adds 120,000 of shuttling, so 405,000 in all, 135.00 per m².
Step 5, compare. The mezzanine saves 124,541 a year, worth 715,694 over the eight years. Against space with no shuttle, it saves only 4,541: a coin toss.
| Years left | Annuity factor | Mezzanine per m² | Saving vs second building | Saving vs space next door |
|---|---|---|---|---|
| 2 | 1.7833 | 255.92 | -362,769 | -482,769 |
| 3 | 2.5771 | 183.37 | -145,122 | -265,122 |
| 5 | 3.9927 | 125.59 | 28,224 | -91,775 |
| 8 | 5.7466 | 93.49 | 124,541 | 4,541 |
| 10 | 6.7101 | 82.99 | 156,022 | 36,022 |
| 15 | 8.5595 | 69.47 | 196,594 | 76,594 |
The break-even is 4.51 years remaining against a second building, 7.78 against space next door. An occupier three years from a break pays 183.37 per m² for its deck, more than twice the rent on the main floor, unless it can extend the lease or sell the mezzanine to the landlord.
A landlord with a cheaper cost of capital and a longer horizon can fund the deck and charge rent on it, typically a fraction of the ground-floor rate. At an illustrative 25 per m², a third of the 75 ground-floor rent, the mezzanine earns 75,000 a year on 1,200,000: a 6.25 per cent yield on cost. Valued at 5.5 per cent, that income is worth 1,363,636, a profit of 163,636. The landlord breaks even at 22.00 per m².
The occupier then pays 25 of rent plus 22 of running cost and tax, 47.00 per m², about half the 93.49 of funding it alone over eight years. Both sides gain because the deck is financed over the building's horizon instead of the lease's. The catch is the rent review: a landlord-funded mezzanine is the landlord's improvement and is rented, while an occupier-funded one is normally disregarded, so the lease drafting decides who owns the upside.
Quoting the mezzanine at 400 per m² and setting it against 75 of rent, as though the deck were a perpetual saving. It is a capital outlay that must be recovered over the years left on the lease, and it carries tax, running cost and a reinstatement bill. The second mistake is to forget what a mezzanine can and cannot hold: decks are usually rated for light picking and packing loads, not for pallet storage, and they can shade sprinklers and block clear height above racking. Count only the area the operation can actually use.
The occupier's cost of occupation and the renewal arithmetic are worked in the free workbooks for this case. For how much of a building's height a racking layout really uses, see how many pallet positions fit in a warehouse.
It varies with span, load rating and fire requirements, so any figure is illustrative. In the worked case the structure, deck, stairs and handrails cost 350 per m² and sprinklers, fire protection and lighting another 150,000 on 3,000 m², 400 per m² in all. Over eight years at 8 per cent, with running costs and tax, that is 93.49 per m² a year.
Only if enough lease is left. An illustrative 3,000 m² mezzanine costs 93.49 per m² a year with eight years remaining, against 135.00 for space in a second building once 120,000 a year of shuttling is counted. With three years left the deck costs 183.37 per m² a year, and it loses to both alternatives.
Usually not if the tenant paid for it: tenant's improvements are commonly disregarded at review, though the lease wording decides. If the landlord funds it, the deck is part of the demise and is rented, often at a fraction of the ground-floor rate. At an illustrative 25 per m² on a 1,200,000 deck, the landlord earns a 6.25 per cent yield on cost.
This article is one calculation from Logistics and Industrial Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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