Make sure you can easily respond to your business’s changing commercial real estate needs with a workable lease length clause in the contract.
You need to pay attention to contract issues involving renewal options and lease lengths in order to give yourself the flexibility to respond to your changing commercial real estate space needs.
Renewal options for an office lease can help you deal with the uncertainty of your company’s future space needs. However, some landlords may be reluctant to grant such options because they limit their flexibility to market the space to prospective tenants.
If the landlord is willing to consider a renewal option, try to get the option rent at a fixed, pre-determined price. Avoid the renewal options that are based on “fair market rent.” Here are the key issues for renewal options:
- How many option terms can you get?
- How long is each option term?
- What is the rent for the option term?
- How many days in advance do you need to give notice in order to exercise the option? The shorter, the better.
The length of the lease has a significant impact on the rental rate. Landlords typically like longer term leases and are more willing to make concessions for such leases.
With a long lease, the landlord enjoys the financial security of a regular rental stream over a number of years. And the landlord can avoid the hassle and expense of re-leasing the space.
From the tenant’s side, a long-term lease has both benefits and risks. One benefit is in knowing that the premises are available at a predictable cost for the long-term.
Another benefit is that you could get a larger tenant improvement allowance from the owner if you amortize the cost over the lease term.
The risk is that your company
- may outgrow the space
- may need less space as its business contracts
- is locked into paying what turns out to be above-market rent if demand for rentals subsequently declines.
If you can get it, the best of all worlds is a shorter-term lease with renewal options. You are usually much better off getting a two-year lease with four two-year renewal options rather than getting stuck in a 10-year lease.
Commercial Real Estate Group of Tucson specializes in representing tenants and corporate users across the United States. For more information call 520-299-3400.