Tuesday, November 8, 2011

Lease Terms

Next segment in our Leasing Series…Lease Terms.

Outside of the actual lease rate itself (meaning the $’s per ft.), defined lease terms are the next most important aspect of the deal for both tenant and landlord. It represents the commitment between the parties, for a set period of time for use of the premises.

Terms will generally vary from market to market, and even from property to property. Newly built developments, be they offices/retail plazas, or industrial buildings, are based on longer term commitments for the most part. Typically 10 years would be the standard, at least for an anchor type tenant - with say 5 year leases being available only to smaller scale tenants. Lease terms are also vital to the financing which landlords arrange on these new builds. Generally landlord’s use the 5 year threshold as the bare minimum.

On existing buildings in most categories, term arrangements can become much more flexible. Start-up businesses often times prefer to stick with shorter commitments, as they are uncertain as to business volumes and growth plans in the early days. Bear in mind though, with 2 and 3 year commitments, landlords have little incentive to assist the tenant in any improvements which the space may require. Shorter term deals for the most part, would be done on an 'as is’ basis from the landlord’s side.

Just a quick note on renewal options (beyond the initial lease term). They are generally provided for on the tenant’s behalf, at a pre-set period in advance of the lease expiration (typically 3-6 months). This then gives the tenant the right to exercise his option to renew the lease, for a pre-determined period. In most instances the rental rate ($’s) , needs to be negotiated at the time of exercising the renewal option.

Again seek out experienced commercial realtors with strong leasing backgrounds, to assist you in negotiating the appropriate lease terms for your purposes.

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