We just acquired a large 6 unit by the Seacoast in NH. The property is in a very desirable location, walking distance to downtown, shopping, comedy clubs, bars (nightlife)…etc. This building is "Multi-use" so half is commercial and half is residential. The Residential units flew off the shelves when I had to turn them over, we have a commercial tenant that knows one of the other commercial tenants is going to be removed at the end of their lease. I don't have a problem with a commercial tenant wanting to expand their business, I actually encourage it, they make money, we make money. It's a plan without flaws haha…Anyway we are negotiating lease terms and she wants an "option to re-new" at the end of the lease. I don't like that term because it gives the tenant power over the Landlord. With a commercial tenant is it normal to have an "option to renew" clause in the lease?
Also with this certain unit, it’s a very large unit 2800+ square feet, It would easily be converted to a 3, 4 or even 5 bedroom. Not that I would initially do that but with the "Option to re-new" the would take that ability for conversion out of my hands for multiple years. Thanks guys let me know
@Rick M. I think an option to renew is common in commercial. The renewal is not at today’s rates but think about being the business owner, would you want to expand your business if the landlord has the ability to force you out at the end of the lease? I would want the option to renew at current market rate.
Renewal options are incredibly common in commercial leases, especially retail. You will 100% want an attorney/leasing broker to review the lease for you before you sign to make the terms as favorable to you as possible. Especially if this is your first time leasing commercial space.
Definitely common and a definite incentive to the tenant to think long term. I'd rather have a commercial tenant on a long term lease than have it empty for 6 months while I spend a lot of money getting it ready for residential. If it was empty, maybe convert it. But with a good tenant in there paying rent faithfully, go for the easy money and focus your time and resources on the next deal.
Hope this helps,
@Rick M. Tenants requesting renewal options is super common. Some leases have clauses stipulating what renewal rates would be (e.g. current rent + escalations, pre-set amount, or even "Market Rent") Something to keep in mind, I find NNN leases more appropriate for these scenarios because you don't have the risk of forecasting costs down the road (e.g. Taxes, utilities, etc.) If you do a Gross lease be sure to give yourself a chance to re-adjust should one of the underlying costs adjust dramatically.
@Rick M. I’d say, sure no problem. As long as rent and terms are to be negotiated for the extension. (Basically they can only renew at the terms you want.) It’ll make them feel better/more secure plus you can’t loose that way!