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In
any given year - as a commercial real estate professional - approximately 50 to
85% of our transnational volume is generated from lease originations and lease
renewals. The balance occurs with sales. Certainly this is an industry average
and the percentages vary based upon an agent’s specific expertise. Simply, if
the niche is tenant representation - the deals completed each year will be all
leases. Conversely, selling Single Tenant Net Leased (STNL) investments yields
all sales. Today, I’d like to delve into some specific terms typically
negotiated during a lease transaction. I’ll break these down into new leases
and renewals - similar yet different deals.
New deals. As defined - a transaction which
involves a relocation from point A to point B. These deals are about half of
the lease transactions that occur in a market during a given year. Covered
during most negotiations are the following points:
Term of lease. For leased premises fewer than 5000
square feet, we will see 2-3 year terms. As the square footages increase, so do
the number of years. For a 100,000+ square foot building, we generally ask for
a much longer term - maybe a five year minimum up to ten. The rationale for
this is pretty straightforward. Bigger spaces can lay fallow for longer periods
of time which is costly. Therefore, owners of large buildings want a secured term
for a longer period of time.
Form of lease. Many are unaware that you can ask
an owner for a specific form of lease. Standard forms include those produced by
the AIR-CRE or the California Association of Realtors. As deal sizes increase we
see a preponderance of owner generated leases.
Commencement of lease. The start date of the lease
is an important part of any lease negotiations. We try to marry this with the
expiration of the existing location. If successful, any sort of double rent
payment is avoided.
Possession of the premises. In some cases tenants are
given occupancy prior to the commencement of the lease. This is known as “Early
Possession”. It’s not uncommon to see early possessions of 30 to 45 days prior
to the commencement of the lease.
Lease rate. A critical component of any lease
negotiation is the lease rate and monthly rent that will be paid throughout the
term. Rent amounts may include the operating expenses - such as property taxes,
property insurance, and common area maintenance - also known as an industrial
gross lease or an office full service gross lease. An agreement net of these
operating expenses which is known as a triple net lease.
Increases in rent. Standard in any multi year lease
would be an increase in rent throughout the term. 2 to 3% annually would be
found in today’s market place. Rarely do we see changes in lease rates as they
occur in the consumer price index - the reason for this is the increases are
too difficult to compute.
Tenant improvements. Any sort of office additions, power
distribution, changes in the parking, or general cleanup and painting should be
clearly outlined in the tenant improvement ask. Most leases provide a warranty
for the systems within the building such as air-conditioning, roof, plumbing
and other mechanical systems. However, it’s very important to specifically
outline the condition with which the building should be left prior to
occupancy.
Free or abated rent. In robust times like we’re seeing
industrially - free or abated rent would encompass many fewer months than in
more difficult economic times. As a landlord’s motivation increases so does the
amount of free or abated rent he is willing to consider. Half to one month per
year of the term is pretty standard.
Extension rights. What happens at the end of your
lease? That question is answered via extension rights. Whether they are a Right
of First Refusal to Extend, a Right of First Refusal to take additional space,
a Right of First Offer for additional space or some sort of an Option to Extend
or Purchase or an option to purchase arrangement - all can be found in the
request for an extension right.
Miscellaneous. Many large corporate leases will
have opt-out or termination clause within their leases. Some also might include
an allowance for moving expenses, a must take provision whereby a tenant agrees
to lease a smaller square footage today in return for an absolute agreement to
expand into additional square footage in the future.
Lease renewals. The biggest difference between a
lease renewal and the origination of a new lease is the tenant is currently in
residence and desires to stay. Therefore many of the terms and conditions above
or non-applicable. Things such as the miscellaneous category which includes
termination rights are probably not included in a lease renewal. Many times
free or abated rent are excluded. But the length of term, the lease rate, and
in certain cases clean- up or a small allowance for carpet are included within
at lease renewal. One word of caution with respect to your renewal - please
don’t try this at home! Even if you have a wonderful relationship with your
landlord, it’s always best to have representation by a commercial real estate
professional who is familiar with market conditions and can advise you accordingly.
Allen C. Buchanan, SIOR, is a principal with Lee &
Associates Commercial Real Estate Services in Orange. He can be reached
at abuchanan@lee-associates.com or 714.564.7104. His
website is allencbuchanan.blogspot.com.
