Tenant Leasing 101: Term Length and Alternatives
The following is an excerpt from Jamie Moorhead's new book, Tenant Leasing 101, now available in paperback and Kindle formats on Amazon here:
The length of the lease term is a business decision that needs to be negotiated with the landlord, reviewed with the broker, and analyzed internally. It should be a length that makes sense with respect to the tenant’s business and growth plan. It also should be a length for which the landlord will provide attractive economic and financial incentives. Finally, it should reflect current and anticipated economic realities for tenant by both mitigating risk and allowing for opportunity as they may arise during the lease term.
Preparing a long-term business plan can sometimes be an exercise in futility. A company may have a good grasp of its operations and plans for the next 3 months, or even 12 months. However, to accurately predict growth, opportunities, and challenges in two, five, or ten years can be virtually impossible. A business may find that one aspect of its business thrives while another does not. Future global financial crises, technology advancements, weather and natural phenomenon, and government regulation all may impact a business in ways that cannot be predicted now.
The challenge for a prospective tenant is trying to use these plans and predictions when signing a lease with a multi-year term, often five or ten years. Even though the business may experience dramatic change during the lease term, the rental and operational obligations will not similarly change or lessen during the term.
If a business cannot realistically and accurately predict where, how, or what it will be in one, five, or ten years, then a tenant should consider including provisions in its lease that will allow it to mitigate risk and seize on opportunities.
When deciding how long a lease term should be, a tenant will need to consider several factors, including the following:
Alignment with Tenant’s Business Plan
A tenant should think through the parts of its business plan that it can control. Are the company executives intending to sell the company in the next few years? Are the owners planning to retire soon? Does the company need to follow a store opening growth plan to maintain a national presence, irrespective of whether individual stores operate at a loss? Is this a new business venture, which the owners are happy to wind down if not immediately profitable?
The term length should reflect the tenant’s growth plan and tolerance for risk. A financially stable and growing business may be able to sign a ten year lease without a second thought. A family owned business, in which the matriarch is 75 and the family succession is unclear, may not need or want a lease with a ten year term and two renewal options.
Landlord Economic and Financial Incentives
A landlord likely will offer a few economic and financial incentives to attract a new tenant. Competitive base rent, an additional rent cap or base year, and a tenant improvement allowance all could be included in the landlord’s incentive package. The general rule of thumb is the longer the lease term, the better the incentive package. An experienced broker can help negotiate...
For more, please visit Tenant Leasing 101 on Amazon here.
