Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Strategy

The options to extend are a one-way street in the sense that they only benefit the tenant. If the option is favorable or at market, the tenant may extend. If the option is not favorable, the tenant is in no worse a position. He simply ignores the option and commences to negotiate an extension with the landlord. Options to extend are not bilateral, that is, they do not contain a provision that allows the landlord to require the tenant to extend the term of the lease. If the landlord commits significant monies toward improving the premises for the tenant then, logically, the landlord will insist on a term at least sufficient to recover the dollars spent—and probably significantly longer.

When leasing, a forward-thinking landlord will attempt to stagger lease maturities. A concentration of leases maturing in the same year can severely affect cash flow as well as impact capital outlays needed to retain the tenants. Also, an eye should be kept on the loan maturity. Lenders underwrite based upon leases in place. Therefore, a problem may arise if lease maturities and loan maturity converge. Similarly, lease negotiations should consider economic cycles. Landlords should attempt to anticipate down-cycles and set the lease maturity, if possible, past the projected weak market periods. In contrast, tenants, if possible, should attempt to renegotiate during a high-vacancy period. Obviously, it is difficult to predict the peaks and the valleys, but in a strong market, landlords can ...