Lease Term

In my last post, I discussed negotiating lease renewals well in advance of scheduled lease expirations vs. waiting out the lease term, thus creating a more competitive environment to renew the lease. In each case, the length of term of the extended lease, or new lease if a business elects to relocate, is a key variable that greatly influences the negotiations.

From a building owners’ perspective, the term of lease provides some degree of predictability on the cash flow and ultimately the performance of the building. This is very valuable for landlords and their lenders; since the Net Operating Income (NOI) for a building is a strong indicator of the property’s financial viability.

But what does this mean to the tenant that is negotiating a renewal of its lease or negotiating a new lease altogether? Simply said, it means that lease term will drive the economic terms of the deal; ie: the longer the term, the more attractive the economic terms the business owner or manager will be able to negotiate. This is compounded in a down commercial real estate market, which is the case to the extreme today.

Since the current market is depressed, business owners and managers should be entering into longer lease terms to negotiate as attractive terms as possible for as long as possible. For example, the business will negotiate better economic and business terms today than it will be able to later when the cycle swings back to a normal or even, God forbid, a landlord’s market. Therefore tenants entering into longer lease terms will pay less rent than businesses entering into leases at some later date when the market swings back to a “landlord friendly” market.

But before everyone gets on the phone with their landlord to begin renegotiating their leases, there are things that should be considered, which are:

• Will the space be adequate in size and function for the lease term committed?


• Is the business growing and if so, at what rate?


• Can the building accommodate growth and can growth of the space to accommodate the business be part of the agreement?


• Are any significant changes to the business operation, such as a sale of the business, predictable during the prospective term?

These, among others, are questions business owners and managers might want to ask themselves when considering lease term. Each business has its own unique set of considerations to be examined, weighed and balanced. Once the business vets these factors, it is in a much better position to enter into lease term commitments that best suit the business.