Having a commercial lease that’s longer than a year or two provides benefits for both the landlord and the tenant. As a commercial property owner, you want to avoid vacancy and be secure in the fact that you’ll have guaranteed rental income for at least three years. Tenants often need to show they have a long term lease in place when they’re applying for business loans or financing. Both parties appreciate the security that a longer lease term provides.
Commercial Lease Terms
Most commercial leases are for three to five years. A fixed term lease that stays in place that long will provide security as well as flexibility in rental amounts. You don’t want a term that’s outrageously long. If you have a 10 or 20 year lease, you don’t know how the market is going to perform, and you might lose money on the rental increases you could have implemented.
Building in Rental Increases
It’s not a good idea to sign a fixed term tenancy agreement that has a flat rental rate for the entire term of the lease. Instead, you’ll want to build in incremental rental increases from year to year. For example, your lease might reflect that in year one, the tenant will pay $1.50 per square foot, and then in year two, that will increase by five percent. You want tenants to be prepared for this increase from year to year and a term of between three and five years means you don’t have to re-negotiate that rental amount every year. No one is surprised by the rental increases.
Lease Renewals and Moving Expenses
Begin negotiating your lease renewal well in advance of the end of your current lease. Usually, the tenants will contact us first because they’ll be anxious to renew. That’s due to the fact that moving an office is expensive. Remember this when you’re negotiating your lease renewal. Your tenants will not want to move unless you charge them something outrageous. Provide a renewal option that’s fair for both parties.
If you have any questions about commercial property management in Los Angeles, please contact us at Los Angeles Property Management Group. We have been on both sides of commercial leases; representing owners and negotiating our own leases as tenants. We’d be happy to answer any questions you have.