Is a one year lease with a five year option a good deal for the tenant?

In Leasing Property - Asked by Jessica J. - Jun 18, 2012
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Answer(s)

James B.
Broker/Agent
The Colony, TX

Yes, if you have a start up business its a safe way to go. Make sure the option has the lease rate spelled out and not just market rate. Make sure you know what you triple nets are and what those cost enclude.

Jun 19, 2012
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Rob B.
Chandler, AZ

Jessica...
If you are the tenant, this can be either a good deal or a bad deal. It is a strong point if the first year rent is going to be stable for some years in advance. For a landlord to give a five year option with a one year lease, he is not likely to spell out the five year option rate. An option is always more beneficial to the tenant than it is the landlord, so normally a landlord will not get specific and will have the rates either be left to negotiation or market.
If rates are lower, as they are in this bad real estate economy at the moment, and you believe that the rates are going to significantly increase in the future, it may be better to negotiate a longer term lease at the lower rates that may exist for you today.
It is absolutely a tenant's market in most areas today. Having gone through several of these in the past, I previously marveled at the tenants that had really low rental rates in a high rent market, because they had trusted in their judgment to lock in rates a long term lease.
To discuss this just a bit more, if you have a long term lease with low rates, you should absolutely make sure you have to right in the lease to assign your lease or to sub-let. This will allow you to perhaps leverage your position in the future, where you may be able to enjoy the spread between the rates in your lease and higher market rates at the time.

Onward and Upward!
Rob Baird
rob@capratecommercial.com

Jun 19, 2012
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azam m.
Suffren, NY

no, atleast 10 year + 1 5 year option.

Jun 19, 2012
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Eric c.
Owner/Investor
Dunn, NC

Yes

Jun 20, 2012
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Deborah R.
Broker/Agent
Oakland, CA

Yes it Tleast gives the tenant the security of having the right to stay at ideally a defined rental rate vs. market rate. Usually the option term equals the base lease term so this is a favorable option for the tenant with little benefit to the landlord. It may have been done to entice a long term tenant after a year trial with building, landlord, area, etc.

Jun 20, 2012
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Israel S.
Broker/Agent
Brooklyn, NY

A option for rent is usually good for the tenant, because he is in control of making the decision if he would like to continue the lease. It also avoids negotiation after the lease expires.

Jun 20, 2012
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Michael H.
Broker/Agent
Manhattan, NY

Depends what the rental rate is on the option. If it is a market rate or an increase on the original lease rate.

Jun 20, 2012
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Korey J.
Broker/Agent
Alpharetta, GA

Its a good option if you can get an excellent rate now and tie the option term rate to the first term. I.e. negotiate the second term escalation to say 2% over the first year, then small annual escalations from there. It's less desirable if you cannot do this as especially if you have any money into the space for signage, build-out, etc.

Jul 1, 2012
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