What is the appropriate length of lease for your business? You may be looking for a long or short-term lease. Factors such as the age and stability of your business, your plans for growth, employee impact study, the nature of your work, and the changes you’ll expect in the neighborhood will all affect your decisions. So what should the length of lease look like and what items can you negotiate based on the length of lease? You and the landlord need to see eye to eye on the following issues before you begin serious negations:
- Amount of rent (or, if it’s a net lease, a good approximation).
- Size of the space. The ways landlords measure space BOMA is a great resource to understand how commercial square footage is measured.
- Length of lease (its term)
- Options- the landlord’s willingness to let you extend the length of lease or expand into additional space in the future, if that’s important to you.
- What renovations if any will you need?
- If there are renovations, you’ll have to negotiate landlord’s tenant improvement contributions.
Some landlords may not be able to give you the length of lease you’d like. The space may be the subject of an option held by another tenant, with plans to take the space sometime in the future. For example, in a multitenant property an existing tenant may have an expansion right into “your” space that may be exercised at a specific date. If so, the space will be available to you only until that time. The landlord can’t’ offer you a lease that extends beyond the exercise date of the option-holding tenant. Even landlords who are not constrained by preexisting options may still be unwilling to meet your needs. This is why it’s important to create a short-list of alternative spaces to consider.
Getting a Short-Term Lease in a Long-Term World
If you’re uncomfortable with a lease longer than a year, but the landlord is looking for a tenant to sign up for five years, the deal may not be workable. Is there a reasonable likelihood that the landlord will agree to a shorter term? The answer will depend on current market conditions. Like many other issues in lease negotiations, the landlord’s willingness to bend a bit may depend on whether it’s a “Tenant” market or “landlord” market. Vacant space is expensive to carry and the landlord may have to make some compromise to get some rent income flowing in. By contrast, if it’s a “landlord’s” market, the landlord is more likely to hold fast, figuring that some other tenant will show up soon who’s willing to sing a longer-term lease and meet the landlord’s other demands as well.
If the landlord insists on a lease term that’s longer than you’d like, all is not necessarily lost. You may decide to agree to a length of lease that’s longer than ideal say three years rather than one as long as this gives you a way to get out earlier (option to terminate). To set up this contingency, you can terminate the lease after a set amount of time as long as you pay a predetermined amount such as a month or two of additional rent. You may be able to get out of a long lease by turning over your rented space to another lease (by subleasing or assigning) most leases allow you to do both, but only with the landlord’s consent If you can find a qualified replacement, this may be your ticket out, since it may state landlords can’t unreasonably turn away an acceptable prospect.
Is the Space Available?
For some businesses, the move-in date is crucial. For example, if you’re already renting space and looking to move, you may need to give yourself enough lead time to transition to a new space. Or the building may be getting sold and you have a hard-stop date that you have to move out. You may urgently need to be installed in your commercial space by a certain date to be ready for seasonal demands such as a tax preparer, or accountant.
Coordinating your needs with those of the landlord can be difficult. Some of it may be in the control of the landlord and depending on your tenant improvements some of it may be outside their control, such is the case with materials and supply chain issues. It’s easiest when the space is vacant and you and the landlord agree on a firm move-in date that’s a month or two away. But if the space needs major work or you’re concerned about whether the current tenant will vacate on time, you may have a problem. It’s always best to start looking for new space 6 to 8 months from when your lease is expiring. If you have a clause in your lease giving you the right to renew it (an option clause), you may want to consider exercising it. But be careful, your option may be longer than you need. If the landlord refuses and you’re obligated for the entire term, you’ll have to try sublet when your new space becomes available. But because subletting usually requires the cooperation of the current landlord, this approach may not work.
Looking to gain some more insight on the Commercial Real Estate market in Phoenix?
There is no denying the influx of demand we’re currently seeing in Phoenix. As a result of a rapidly growing business environment, and the right social info structure to support it, Phoenix is likely to hold high-quality investment opportunities for years to come. ICRE Investment Team has partnered with the most prominent businesses, banks, construction companies, and investors to provide the most up-to-date information on Phoenix’s market condition and opportunities. Feel free to reach out to us for more information at any time.