Category: commercial real estate

Lease Extension Clause – What to Know

What to Know About The Lease Extension Clause

When you’re signing a commercial lease, the extension clause may not seem as important as some other details like the rent and operating costs, but it’s a mistake not to carefully read the extension clause. Because tenants tend to receive the most benefits from this portion of the lease, landlords may try to use restrictive language or omit the clause entirely. Knowing the following information about lease extension clauses can help you protect your company from being forced to move at the end of your lease.

1. How to Notify Your Landlord
The lease extension spells out precisely how and when you need to notify your landlord that you intend to renew your lease. In most cases, you will need to submit written notice to the landlord. Leases may require you to do so 6 to 12 months before the end of the lease or by a certain deadline that is specified in the clause. If you fail to notify your landlord properly or on time, you will be ineligible to extend your lease.

2. Landlords Will Push for the Original Term Length
Most landlords will make the term of lease extensions equivalent to the original term of the lease, particularly if you previously had a short-term lease. To give yourself more flexibility, you can ask for the option to renew at different length terms. For example, you may have language inserted that gives you the ability to renew for three or five years.

3. Your Rent Rate May Not Be the Same Under the Extension
Landlords will often try to raise the rent when you sign an extension. In some cases, the clause may say that you can extend your lease with a new rent based on the current fair market value of your space at the time of renewal. It’s also possible for landlords to insert language that allows the rent to be increased with an extension based on changes in the consumer price index.
When possible, negotiate to extend your lease at your current rent. If the landlord refuses, you can ask to have the initial rent for the lease extension calculated based on whatever rent escalation method is used over the course of your current lease. Should you be unable to achieve this concession, make sure that at the very least the method of calculating the fair market value of the office space is spelled out clearly in the extension clause.

4. A Tenant Rep Broker Can Help You Get the Best Terms Possible (AT NO COST TO YOU – THE TENANT)
Tenant rep brokers are incredibly beneficial throughout the commercial real estate search process and can give you an edge when you’re negotiating your lease. With their knowledge of the market and potential relationship with your prospective landlord, tenant rep brokers can evaluate the extension clause, point out areas of concern and help you fight to have them changed. As landlords pay the fees for the tenant representative, having one at the negotiating table with you will not increase the costs of your move.

Source ReOptimizer Don Catalano

Pros and Cons to Short or Long Leases

So which is best for companies?

If you’re getting ready to lease a commercial space, finding the right property or unit is just the first step in the process. To get the most benefits out of the right space or property, you need the right lease agreement in place between you and your landlord and that means deciding whether a short or long-term lease is the better option for your business.

There is no single answer. Short and long-term leases both have distinct benefits and drawbacks that you need to be aware of before you begin lease discussions with a prospective landlord.

Advantages of a Short-Term Lease

– Your Business Is More Mobile. With a short-term lease, you’re not limited to your current space for long. If the location proves to be less than ideal, you decide a particular market isn’t right or your business grows by leaps and bounds, you’ll have the chance to relocate.

– The Process Will Move Faster. Short-term leases are usually much less complex, so if you need space quickly, they can be a good option.

Disadvantages of a Short-Term Lease

– Your Future Is Less Certain. With a short-term lease, you don’t have many guarantees about the future. It’s not easy to forecast expenses when you don’t know how much rent will cost in the future. There is also always a risk that the building may sell or your current landlord may decide to take the building in a new direction, leaving you unable to renew.

– You May Pay More for Your Lease. Short-term leases often end up being more costly for businesses not only because the rental rates are usually higher, but also due to the higher risk of costs associated with relocating once leases are up.

Advantages of a Long-Term Lease

– You Have More Bargaining Power. Landlords typically prefer long-term leases, and if you’re willing to commit to one, you have more leverage to negotiate. Concessions like lower rents and more flexible terms can make long-term leases very attractive.

– You Can Plan for the Future. Once the lease is signed, you can easily forecast rental costs and be assured that you won’t have relocation costs for a set period of time.

Disadvantages of a Long-Term Lease

– Negotiations May Be Lengthy. The complex nature of long-term leases can make for a slower negotiation process.

– You Are Locked In–Probably. With long-term leases, you usually won’t have the flexibility to move into a different market or to expand into a new location. That said, some landlords will offer break options at certain times during the lease period, giving you the chance to move if you need to.

Ultimately, you need to think of your company’s future as you consider whether to enter into a long or short-term lease agreement. If you’re not sure whether or not you want to remain in the area, suspect that a period of growth is on the horizon or are otherwise uncertain of the future, a short-term lease will likely be the best choice for your company’s needs. On the other hand, businesses that are ready to become established in an area, are no longer expanding rapidly and are financially stable can benefit largely from a long-term lease.

Benefits of Short & Long Commercial Leases

lease
When choosing between a short or long commercial lease, there are certain things to consider.  There are benefits of choosing either a short-term commercial lease or a long-term commercial lease for your business.

Benefits of Short Commercial Leases

A short commercial lease is generally less than 5 years. For companies who want to test their concepts and their markets, they will often find a short-term commercial lease the best.

According to Bloomberg, 80 percent of businesses fail in the first 18 months. Having a short-term lease will save business founders from the hook of unpaid rent if they go out of business. With short-term leases, entrepreneurs can experiment their new ventures with a low-risk rent.

Tenants can scale up or down without any difficulties. They can also move to a new location without significant loss in rent payment.  long-term tenants would have to transfer or sublease their lease to another tenant in order to relocate.

Benefits of Long-Term Commercial Leases

A long-term commercial lease is a lease that is more than 5 years. To control rent expenses over a long period, many businesses (especially retailers) negotiate leases in excess of 20 years. Here are additional benefits of signing a long commercial lease.

In a long-term commercial lease, you know how much your rent will increase annually, regardless of what happens in the market conditions. This helps businesses to make long term business plans without being concerned about market fluctuations.  With predictability comes stability. Stability helps your business. you will be around  for a while—enough to register your brand in the mind of your customers.  It  helps ease the inconvenience that your employees may experience if you were changing locations often.

With a long commercial lease, you have more bargaining power. There are certain rights that tenants who sign long commercial leases enjoy that those on short term leases do not have.  Landlords are more willing to give tenant improvement allowance like free rent or access to a larger space.

Both short commercial leases and long commercial leases have their advantages and disadvantages. The choice between short or long commercial leases depends on a number of factors.

Careful considerations must be made in examining the business objectives before signing the leases. In addition, you have to consider your company’s future as you enter into a long or short-term lease agreement. If you expect to be around for a long time, you may want to consider a long commercial lease, otherwise, it would be safe to sign a short commercial lease.

Related Article:  Pros and Cons to Short or Long Leases

 

Source:   Don Catalano  Re-Optimizer

Opinion of Lease Rate

Are you a Landlord with a commercial / industrial space for lease?

A Landlord needs a real estate professional to assist in selecting the Tenant for the property as well as effectively placing the commercial or industrial property for lease on the market.  Leasing a commercial real estate property requires a lot of research and planning as well as a lot of leg work in finding the right business to occupy the space.  Target Realty Corp. will do all the work – while you continue to run your day-to-day operations.

but first – we need to established the lease rate.

Unlike sales statistics, there is no requirement to report commercial lease rates within our industry.  Lease rates are not public information.  We gather our information internally and from our industry contacts.

We consider current net asking rates for the Calgary market, the most comparable deals completed in the last year, and trends for comparable land and building size range, function and location.  We consider the specifics of your location: transportation and bus routes; age, quality, and construction of the building; offsite improvement; site specifics; business neighbours; environmental concerns.

The considerations used to value the properties and conversion of that value into a market lease rates involved the following:

Land Value ~ Building Value ~ Building Features Value

Market Comparables ~ Market Capitalization Rates ~ Today’s Comparable Options

Opinion of Value

OPINION OF VALUE

What is a “Realtor Opinion of Value” (ROOV)?

As part of the real estate transaction process, the first thing that needs to get done is establish a sale value of a commercial property.

Property owners requiring an opinion of value, but who do not require a formal appraisal can use the service of a commercial real estate brokerage.

How is a “ROOV” determined?

Three generally recognized methods can be applied to evaluate the property;  the cost Approach, the Income Approach and the Direct Comparison Approach.

Value by the Cost approach is determined by adding the land value to the replacement cost of the improvement less depreciation.  The Income Approach involves the capitalization of a property’s net income or “potential” net income at an appropriate market rate, into an indication of value.  The Direct comparison is applied by comparing the subject property to similar properties that have sold recently or are on the market.

What information is included in a “ROOV” ?

  • Description of the property’s physical characteristics
  • Description of the neighborhood in which the property is situated
  • Historical and current market data
  • Property photographs
  • Sales comparables
  • Comparable properties for sale
  • Market valuation
  • The realtor’s opinion of current market value