Need some assistance/advice from those in commercial real estate.

We have a building we are considering leasing to another company. Lease term is for an agreed upon 10 years. The language, however, states "atleast four five-year renewal options."

I know renewal options are put in leases to the benefit of the tenant but is four 5 year renewal options crazy from the landlord perspective? Is this normal/reasonable?

Does this mean the tenant can effectively make this a 30 year lease if they choose?

Thanks in advance!!!!

Yes they could stay up to 30 years. Four renewal options is more than typical, unless this is some kind of specialty, build to suit property.

How is the renewal rate determined?

TxAG#2011 said:

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Yes they could stay up to 30 years. Four renewal options is more than typical, unless this is some kind of specialty, build to suit property.

How is the renewal rate determined?

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Maybe I am missing something but that seems insane from my perspective. They have asked for 2% annual increase but thinking it should be 4% at minimum? Thoughts?

You can always have minimum escalator and also tie it to CPI (whichever is greater)

BoDog said:

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TxAG#2011 said:

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Yes they could stay up to 30 years. Four renewal options is more than typical, unless this is some kind of specialty, build to suit property.

How is the renewal rate determined?

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Maybe I am missing something but that seems insane from my perspective. They have asked for 2% annual increase but thinking it should be 4% at minimum? Thoughts?

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What kind of building is it? Is the renewal option also a % increase over the base term?

TxAG#2011 said:

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BoDog said:

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TxAG#2011 said:

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Yes they could stay up to 30 years. Four renewal options is more than typical, unless this is some kind of specialty, build to suit property.

How is the renewal rate determined?

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Maybe I am missing something but that seems insane from my perspective. They have asked for 2% annual increase but thinking it should be 4% at minimum? Thoughts?

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What kind of building is it? Is the renewal option also a % increase over the base term?

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5500 sq. feet zoned mixed use. Building described as special use. 2% annual increase year over year-including renewal option/s.

I cannot explain why, but the thought of having the building tied up for 30 years gives me pause....

All the renewal options in the buildings we own are "at then prevailing market rates." Which at the end of the day winds up meaning the tenant nor the landlord can be totally screwed and the renewal terms are effectively always a negotiation of new Ti , rates, etc.

Our lease has language stating renewal based on market rates. It's not black and white going on "market value", but basically gives us first right of refusal when lease ends.

I would add one more thing……make sure any renewal option requires them to give you at least six to twelve months notice of intent to renew and have the require the renewal to be executed at least six months prior to current lease expiration to be valid. This ensures they have a proper sense of urgency to either agree or disagree so you can re-lease as quickly as possible if they vacate. And…..any holdover should be paid at 200% of the then current rate.

Oh, and I'm not an attorney. You should definitely have an experienced real estate attorney help you with the initial lease and any subsequent extension/renewal.

Two 5 year renewals at then-market rates would be closer to market terms. If they want to tie up the building for longer, then negotiate CPI related rent escalations, or something which mitigates the time risk for you as the Landlord and maximizes the value of the lease. They can't have it both ways.

Would annual 2.9% rent increases fit that mode? They are asking for 2.0%.

The market rate on annual renewals is somewhere around 3-3.5% currently.

I would definitely not do renewal options at a fixed rate. As others above said, use "market rate" for renewals.

Way too much to loose for a landlord to agree to a rate that far in advance.

Those option periods make it an exceptionally long lease. Need to have the lease terms reviewed extensively to make sure you know what you are potentially committing to for the next 30 years.

COSciAG said:

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The market rate on annual renewals is somewhere around 3-3.5% currently.

I would definitely not do renewal options at a fixed rate. As others above said, use "market rate" for renewals.

Way too much to loose for a landlord to agree to a rate that far in advance.

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3.5-4% yearly increases are what most landlords I work with are wanting now in Houston

All of our renewal options (on property I own) have the at 100% of current market rate and also not less than tenants current rent type language. If rents drop a bunch like they did 10 years ago I don't want to be locked into a rent that doesn't cover my loan etc.

BoDog said:

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TxAG#2011 said:

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Yes they could stay up to 30 years. Four renewal options is more than typical, unless this is some kind of specialty, build to suit property.

How is the renewal rate determined?

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Maybe I am missing something but that seems insane from my perspective. They have asked for 2% annual increase but thinking it should be 4% at minimum? Thoughts?

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Edit: I read a little more of the the thread and picked up more color.

Personally, I wouldn't give them more than one renewal and I would make it to be negotiated at the current market rate. Unless I was committing very heavy TI dollars to something exceptionally specific there is no way in hell that I would allow a building to be tied up by one group for 30 years. Even then they better have on hell of a balance sheet.

We typically like to avoid going beyond the amount of years in the primary term with the option periods. So, if they are signing a 10 year lease, I would propose two 5-year options.

That is a high number of options, but landlords are not getting 4% annual rental increases on commercial properties. Depending on the specifics of the building, you may as the landlord be getting above market rent. I really need more information on the situation to give you my thoughts.