Other Important Commercial Lease Clauses
Several other options and clauses are designed to protect the needs and concerns of the owner and tenants and should be negotiated carefully.
Lease Renewal Options
Many commercial leases grant a tenant the right, but not the obligation, to renew a lease for prespecified period of time after the initial lease expires. The rate at which the lease can be renewed is specified in the initial lease contract.
Expansion and Relocation Options
It is imperative that the lease give the tenant the right to occupy additional space in the office building or shopping center, after a specified notice period, at market or defined rental rates if tenant business grows.
In some cases, the owner will agree to give a tenant the right of first refusal when space becomes available in the building or center. In other cases, the owner will agree to relocate the tenant within the building or shopping center as soon as possible, if additional contiguous space cannot be provided in a reasonable time frame.
Important Lease Considerations for Owners
The credit worthiness of commercial tenants usually depends on their ability to operate a business profitably. Thus, commercial owners usually analyze the need for a tenant’s business in the community and the tenant’s abilities to operate the business.
Certain types of businesses are quite compatible with each other, whereas others detract from one another. Reputation and prestige also affect surrounding businesses and, ultimately, property values. Highly regarded tenants contribute to the desirability of an office building or shopping center.
Many tenants require specialized space or equipment. Lessees usually provide any special equipment, but they expect lessors to install items regarded as part of the real estate, including plumbing, electrical service, sinks, stoves, and cabinets.
Important Lease Consideration for Tenants
Commercial tenants have some concerns similar to those of owners. They want properties that are compatible with their uses, are well located for their business, are well maintained, and enable them to operate their businesses profitably. The property’s location and physical characteristics should meet the tenant’s needs. Many commercial businesses rely heavily on traffic and access appropriate to their use.
The physical characteristics of the site and building must be considered.
Financial Impact of Lease Clause Decisions
After a decision has been made to lease and the markets have been researched, the client may have several alternatives to choose from.
This section analyzes the quantitative costs that the lease imposes on the user. Some commonly used terms will be defined below. These terms and definitions often vary from market to market.
Base (contract) rent: This is a face, specific, defined, contract dollar amount of periodic rent. The annual base rate is the amount upon which escalations are calculated.
Total effective rent: This is the base rent adjusted for concessions and allowances and for costs that are the responsibility of the user (such as operating expense pass-throughs). Total effective rent is the total of all cash flows over the term of the lease.
Total effective rate: This is the total effective rent divided by the square footage.
Average annual effective rent: This is the total effective rent divided by the total years of the lease term.
Average annual effective rate: This is the average annual effective rent divided by the square footage.
I hope you have enjoyed reading and learned something about commercial leases.
Thank you for taking the time to read and I welcome your comments
The full article series, which was previously published in Invest Magazine and can be read in its entirety here: http://www.panamacityrealtygroup.com/leasespart1.php
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