Many companies are torn between wanting the lease incentives that landlords offer for long term leases and also wanting the flexibility for their company to grow, shrink or move in a shorter time period.
Sometimes it might appear like its an either/or choice:
1. Take a long-term deal and get a large tenant improvement allowance, free rent, space planning allowance, lower rent rate, etc, OR
2. Sign a short term deal so you have flexibility but don't get any incentives
However, a Termination Option might be a workable solution that both you and the landlord can agree to.
How It Works
1. You sign a long-term lease (ie, 5, 7, 10, 12, 15+ years) and the landlord provides corresponding concessions
2. You negotiate a termination option to terminate the lease at a specific date or within a specific range of dates (ie, between the 3rd and 5th year)
3. If you decide to terminate, you provide notice to the landlord at a specified point along with a termination fee
How are Termination Fees Usually Calculated?
All transactions are negotiated on their own merits. Termination fees are often set up as a tenant paying the 'unamortized transaction costs amortized at x% rate' at the time of termination. Transaction costs are typically defined as the tenant improvement allowance, free rent, brokerage fees, legal fees, and any other costs that the landlord incurred to have you as a tenant.
A Hypothetical Example
Say there is a 10-year lease, with $200,000 in Tenant Improvements, 3 months of free net rent (equal to $24,000), and $60,000 in brokerage and legal fees to have the deal signed. Then the total transaction costs would be ($200k + $24K + $60K) $284,000.
Amortizing this over 10 years (the same as a mortgage, car loan, or any other loan) and assuming that the rate agreed to in the lease document was 7%, this comes out to a monthly "payment" of $3,278.36 which is what is being paid through your Net rent rate. If the tenant has a Termination Option at the end of the seventh year, the 'unamortized balance' at that point would be $106,174.39 (or about 6.5 months Gross rent at that point).
Although this wouldn't be free, it would still be better to have this choice than to need to continue to pay rent at that space for the next 36 months through the end of the natural term of the lease.
Sometimes it might appear like its an either/or choice:
1. Take a long-term deal and get a large tenant improvement allowance, free rent, space planning allowance, lower rent rate, etc, OR
2. Sign a short term deal so you have flexibility but don't get any incentives
However, a Termination Option might be a workable solution that both you and the landlord can agree to.
How It Works
1. You sign a long-term lease (ie, 5, 7, 10, 12, 15+ years) and the landlord provides corresponding concessions
2. You negotiate a termination option to terminate the lease at a specific date or within a specific range of dates (ie, between the 3rd and 5th year)
3. If you decide to terminate, you provide notice to the landlord at a specified point along with a termination fee
How are Termination Fees Usually Calculated?
All transactions are negotiated on their own merits. Termination fees are often set up as a tenant paying the 'unamortized transaction costs amortized at x% rate' at the time of termination. Transaction costs are typically defined as the tenant improvement allowance, free rent, brokerage fees, legal fees, and any other costs that the landlord incurred to have you as a tenant.
A Hypothetical Example
Say there is a 10-year lease, with $200,000 in Tenant Improvements, 3 months of free net rent (equal to $24,000), and $60,000 in brokerage and legal fees to have the deal signed. Then the total transaction costs would be ($200k + $24K + $60K) $284,000.
Amortizing this over 10 years (the same as a mortgage, car loan, or any other loan) and assuming that the rate agreed to in the lease document was 7%, this comes out to a monthly "payment" of $3,278.36 which is what is being paid through your Net rent rate. If the tenant has a Termination Option at the end of the seventh year, the 'unamortized balance' at that point would be $106,174.39 (or about 6.5 months Gross rent at that point).
Although this wouldn't be free, it would still be better to have this choice than to need to continue to pay rent at that space for the next 36 months through the end of the natural term of the lease.
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