Office Lease term how long should it be?

Let’s take a look at lease term and how long it should be, 2 positions are at hand the landlord’s position and the tenants position when it comes to warehouse or office spacein Austin. Typically the landlord likes to have longer term tenants. What could change that desire? If a tenant is a start up and the landlord has been burned before by tenants who bailed out of a lease or two, they may want to go with a shorter term because they have less exposure monetarily.  However, a longer term lease is beneficial so the lease rate would keep up with the market, taxes and expenses as well as other costs. A landlord could lose a lot of money if they have an ARM type mortgage on a property without a long term lease in place.

Tenant’s position

The next position of course is the tenant’s position.  When a tenant leases a commercial real estate property such as an office or warehouse space in Austin and it is in a good location, they would usually prefer a lease that is for the longest term possible. This is especially true if the tenant is spending a lot of tenant improvement dollars (TI) to improve a space they are leasing. If a tenant wants to sell their business at some point, a longer term lease makes the sale of the business more attractive to potential buyers.

How long should a lease term be?

If a tenant does not want a longer lease term, it could be because they are testing the location or they are not sure about how successful their new location is. If a business does not make it , a tenant does not want to be bound by a 5 year lease term. The downside to short term leases is that they lose a lot of leverage in negotiations as well, especially if the landlord is being asked to put up some tenant improvement dollars.  There are out clauses that allows the lease term to be less, however they are not easy to get for the tenant and they do have penalties attached to them or what is commonly called “buyouts”.  Also in conjunction with lease term a renewal clause is a good provision to have especially if the tenant is successful, renewal options only benefit the tenant because if the market turns down, the tenant can decide to re-negotiate or leave the property for a better deal elsewhere.

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