Discount proposed rate for a 10 yr lease over a 5 yr

Commercial Real Estate Investing
7yFollow

Discount proposed rate for a 10 yr lease over a 5 yr

Ben S.
Brandon, SD · Member since 2014 · 29 posts · 16 votes

I have a large warehouse space that a company is looking at.  They sent an RFP for rates for a 5, 7, and 10 year lease.  It is a well known international company and I would love the security of having a 10 year lease signed with them, but am not sure how much that is worth to me.  Is there another way to put the proposal together to make the 10 year option more appealing to them other than decreasing the rent$/sf?

0Reply
39 views

Most Popular Reply

Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
7y

Basically you front load the benefit so you can have more cash flow and return in the future and higher resale on income versus giving them a straight lower rent for getting the 10 year term.

Get a commercial attorney to help negotiate options that you find favorable. The tenant likely has an attorney on call so you should have one in your corner as well. How hard you negotiate depends on what other options the tenant has for similar space in the area and how many of these types of tenants come along for space like yours. If tenants are hard to come by and spaces are plentiful in the area for site selections then you tend to have less leverage in negotiating. 

Podcast Guest on Show #47
NNN Invest53 Reviews
WebsiteView Page
1Reply
See this reply in the discussion

6 Replies

Jump to latestLatest
  • Phil Christian
    Rental Property Investor · Yorba Linda, CA · Member since 2013 · 100 posts · 65 votes
    7y

    What PSF are you asking and what is your strike point on an effective rate over the terms?  For simplicity let's use $.50 PSF year 1 with $.05 escalations each year. If that is what you are comfortable with on a 5 year deal... on a 7 year deal add 2 months of free rent and on the 10 yr deal ad 5 months of free rent... front load the free rent in year 1. 

    If you really want to get creative add more free rent on the 10 yr deal and extend the back end term by the number of free rent months.  

    0Reply
  • Ben S.
    OP
    Brandon, SD · Member since 2014 · 29 posts · 16 votes
    7y

    @Phil Christian So I am learning a lot of new terms here.  If I lay out different options like you are proposing and calculate the net effective rate for each of them should the 3 proposals for 3 term lengths be equal?  If they "should" be getting a better deal for 10 years, the question is how much?  I appreciate the information, I am new to this.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    7y

    Basically you front load the benefit so you can have more cash flow and return in the future and higher resale on income versus giving them a straight lower rent for getting the 10 year term.

    Get a commercial attorney to help negotiate options that you find favorable. The tenant likely has an attorney on call so you should have one in your corner as well. How hard you negotiate depends on what other options the tenant has for similar space in the area and how many of these types of tenants come along for space like yours. If tenants are hard to come by and spaces are plentiful in the area for site selections then you tend to have less leverage in negotiating. 

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    1Reply
  • Phil Christian
    Rental Property Investor · Yorba Linda, CA · Member since 2013 · 100 posts · 65 votes
    7y
    Originally posted by @Ben S.:

    @Phil Christian So I am learning a lot of new terms here.  If I lay out different options like you are proposing and calculate the net effective rate for each of them should the 3 proposals for 3 term lengths be equal?  If they "should" be getting a better deal for 10 years, the question is how much?  I appreciate the information, I am new to this.

    Not necessarily but yes you could structure all three (3) to have the same effective rate.  It's NOT necessary but it is a good starting point in your RFP and it will make perfect sense to the tenant.  

    Candidly, you're shooting in the dark here and now trying to negotiate a deal without brokerage and subsequently local market knowledge support. The mental backflips you are going through right now is the reason why commercial real estate brokers earn their fee. 

    0Reply
  • Ben S.
    OP
    Brandon, SD · Member since 2014 · 29 posts · 16 votes
    7y

    Thanks @Joel Owens and @Phil Christian.  With the situation I think it does make more sense for me to put a little more free rent in the longer term lease option versus lower rents for the longer term.  I am working with a broker who I trust.  Longer term leases are still new to me and I get a little nervous I am overlooking something.  Thanks for your tips, I will trust the local professionals that I work with.

    0Reply
  • Phil Christian
    Rental Property Investor · Yorba Linda, CA · Member since 2013 · 100 posts · 65 votes
    7y
    Originally posted by @Ben S.:

     I am working with a broker who I trust.  

     Perfect... good luck on this deal!

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free