Lease negotiations for option period

[Bharath Raj]

Our brokers negotiated a commercial office lease with a national tenant in the LOI. A draft of the lease was drawn and the contract was prepared by my attorney. The tenant' attorney reviewed it and sent it back with several edits. The original agreement was to let the tenant have a 3 year lease with one additional 3 year option at the market rate at the time. However, the tenant' attorney now wants to fix the rent for the optional 3 years right now. This property has been difficult to lease so far. I am inclined to work with this tenant, but I do feel like I don't want to get into a second round of negotiations. Is there a rule of thumb that can be used, ex: a 10% increase in base rents for year 4 when compared to year 1 rents, and then 3% subsequent increases for years 5 and 6? Any guidance would be greatly appreciated

[Michael Hall]

For a landlord in a commercial lease when you agree to the fixed renewal rate you are not guaranteeing that rate as your renewal rate, rather you are setting the ceiling on how much the lease rate will be in the option period. If FMV is significantly below what the renewal rate is set at then a sophisticated tenant will recognize this and negotiate to FMV. If you have had difficulty in leasing the space, then I would not be afraid to set the lease rate out to 6 years (initial plus first option) with market rate increases (2-3%). Another option would be to seek addition initial term, so push them to a 5-year lease with renewal at FMV.