When leasing commercial space companies must decide on the length of lease term. This decision is influenced by a number of factors, including but not limited to, growth projections, continuity of operations, build out needs, economic conditions, etc. Market conditions, outside the tenant’s control can also have an impact. For example, retail landlords generally require minimum 5-year leases and during the early years of the Great Recession landlords were willing to agree to nearly any length of lease term (sometimes as short as 1 year) just to get their spaces leased.
In this series I will be discussing the most common/traditional lease terms: 3-year, 5-year, and 10-year, but will also touch on less conventional terms shorter than 3 years, between 5 and 10 years, and longer than 10 years. I will touch on the Who (generally prefers which), What (you can expect in concessions as a result), and Why (tenants may choose one over another).
Less than 3 years
Most landlords are not willing to agree to lease terms of less than 3 years. Only in rare cases and/or dire economic conditions might a landlord choose to do so. Options for shorter than 3-year lease terms primarily take the form of subleases. Subleases can be great opportunities for tenants looking for shorter term leases as they are often offered below market rates for comparable properties and can also include furniture.
Between 5 and 10 years
The main reason for a lease term between 5 and 10 years is that the landlord requires a longer term over which to amortize the costs of the tenant’s improvements/allowance. As construction costs rise so too will the prevalence of 6 and 7-year leases. Another reason for an “in-between” lease term may be due to the need for space being tied to a contract, franchise agreement, etc. The lease term is then made coterminous with the factor which necessitates the requirement for the commercial space.
Longer than 10 years
Similar to terms less than 3 years, most landlords will not agree to terms in excess of 10 years. They may not want to encumber their space for that long and/or want the opportunity to reset the rent at the then market rate at the end of the term. Renewal options are used as ways to provide tenants with the security of knowing that they will still have the ability to keep their space and allows the opportunity to increase the rent if the tenant’s rental rate at the end of the lease term is below market (landlords’ preferred language is “the greater of market or the then escalated rate”). Ground leases are the exception and can be as long as 99 yeas depending on the municipality in which the property is located. Generally ground leases need to be from 50-99 years for a new development to make sense.
***Did you know Tysons Corner is on a ground lease?***
It’s always recommended to seek the advice and services of an experienced commercial real estate broker when leasing commercial space. For more more information on representation, please contact me at Ryan@RealMarkets.com