Elements of these phases differ for leases that are a new deal vs. leases that are a renewal.
New deals: A transaction that involves a relocation from point A to point B. These deals are about half of the lease transactions that occur in a market during a given year. Covered during most negotiations are the following points.
Term of lease. For leased premises fewer than 5,000 square feet, we will see 2-3 year terms. As the square footages increase, so do the number of years. For a 100,000-plus-square-foot building, we generally ask for a much longer term, say a five-year minimum up to 10. The rationale for this is pretty straightforward. Bigger spaces can lay fallow for longer periods of time which is costly. Therefore, owners of large buildings want a secured term for a longer period of time.
Form of lease. Many are unaware that you can ask an owner for a specific form of lease. Standard forms include those produced by the AIRCRE or the California Association of Realtors. As the deal size increases, we see a preponderance of owner-generated leases.
Commencement of lease. The start date of the lease is an important part of any lease negotiations. We try to marry this with the expiration of the existing location. If successful, any sort of double rent payment is avoided.
Possession of the premises. In some cases, tenants are given occupancy before the lease begins. This is known as “early possession.” It’s not uncommon to see early possessions of 30 to 45 days before the lease starts.
Lease rate. A critical component of any lease negotiation is the lease rate and monthly rent that will be paid throughout the term. Rent amounts may include the operating expenses – such as property taxes, property insurance, and common area maintenance – also known as an industrial gross lease or an office full-service gross lease. An agreement net of these operating expenses which is known as a triple net lease.
Increases in rent. Standard in any multi-year lease would be an increase in rent throughout the term. 2 to 3% annually would be found in today’s market place. Rarely do we see leases with a flat rate throughout the lease term.
Tenant improvements. Any sort of office additions, power distribution, changes in the parking, or general cleanup and painting should be clearly outlined in the tenant improvement ask. Most leases provide a warranty for the systems within the building such as air-conditioning, roof, plumbing and other mechanical systems. However, it’s very important to specifically outline the condition with which the building should be left prior to occupancy.
