Hey, everybody. Joseph Gozlan with Eureka business group here. And today we’re continuing with our serious about retail leases. And let’s talk about a very important addendum that is attached to a lot of the leases we work on, and that is the renewal options. What is the renewal options? So if I’m a tenant that I have a business and I’m going to a shopping center, I’m And I’m putting my business in that shop and said, I’m going to sign the lease.

That lease is going to be for three years, for five years, for seven years. It really depends on who am I, who is, what’s my business requires and so on. I don’t want to be in a position where in three years, when my business is doing great and it’s growing, the landlord can come back and tell me, thank you so much for the great last three years.

I want you to leave. If I’m one of those businesses that have a loyal customer base that depends on traffic, that depends on my location. Moving could be a very expensive and be a problem. I could lose a lot of my business. So we want to make sure that the lease structure is structured in a way that allows me to renew it within certain terms.

Of course, what are those terms? Let’s talk about that. The first thing we want to know is, do I have a renewal option? If I do, how many? And for how long? So an example on a retail lease, we would see a business, uh, sign a lease for let’s say three years or five years, and then they would have two more options for three or extensions each.

So at the end of my five years, I can choose to renew another three years, and then I can choose to renew another three years, that kind of guarantees that I have six more years beyond my five, uh, base years of my initial term. And by then I should have a long. Last thing established business that I’m less worried about either moving or that the landlord will want to get me out of there.

The other option that we would have is maybe just one option period. And then of course, No option period is always on the table, but definitely not in the advantage for the tenant to not having renewal options within the renewal option addendum. If we have renewals, there are going to be a certain terms that are going to be predetermined in the renewal, which means that gives me an opportunity to look at my next 3, 6, 10 years and have an idea of where it’s going.

So there’s three main types of renewal options that we see in contracts today, but obviously a lot of it is dependent on your individual contract. One thing that the renewal option is going to define as well is when do I have to let the landlord know that I want to renew my lease? So usually it will be either 90 days up to six months before my lease expires that I would have to let the landlord know, Hey, I like it here.

I like my business here. I want to extend my contract. I’m going to exercise my options. So within those options, we see, as I mentioned, three different types of extensions. The first one is a fixed amount extension, whether it’s going to be dollars per month or dollars per square foot or a percentage. So for example, if I lease a space and I pay 5, 000 a month, so I could have a renewal option that says, Three year extension at 5, 500 a month, which is a 500 increase for my original lease.

And that’s going to be the rent for the next five years. I could also have a clause that says instead of a fixed dollar amount, I can say 50 cents. per square foot. So if I paid 15 per square foot until this point, it’s going to be 1550. Third option that we have in those fixed amount section is our percentage.

So the lease renewal clause can say renewing for another three years at that percentage for the original rent. The second type that we see in the contracts, mainly in the contract is a CPI increase. CPI stands for consumer price index. And that is a government statistics, the government issue that number on an annual basis, quarterly basis, and you get to know the CPI based on what the federal government is publishing.

That kind of takes away the guesswork. I don’t know what’s going to be, but it helps the landlord protect themselves from dramatic increase in inflation. and having a fixed rate. Obviously, this is more in favor of the landlord than it is in favor of the tenant. We normally see that in government. In municipal kind of contracts, which means I have a building and the state of Texas is renting it for me to put child protected services or a courtroom or any the police department and so on.

Surprisingly, they don’t always own those buildings. Sometimes they lease those buildings and then the last option is one of we see more often and that is fair market value. Thank you. And what does fair market value means? It means that in five years, when my lease is over, the landlord is going to tell me what the renewal rate is going to be based on what is prevalent in the market at that time.

It’s a little bit gray and it’s a little bit uncertain, but it’s better than having no renewal options for the tenant. For the landlord, it’s protection against inflation. It’s protection against a lot of things. And it guarantees that when I renew my lease as a tenant, I’m going to have a fair rent for everybody.

Now fair market value means my rank can go up, but it also means my rank can go down. So it’s a lot about timing and what’s going on, but think about it this way. If I am the tenant and I am paying 10 bucks per square foot, and then five years later, the market went boom. And now everybody’s paying 20 per square foot.

I’m going to have to go to 20 per square foot, which is significant increase. But if I would have left that space right now and go find another location, I would still pay the 20 per square foot because that’s the market rate. That’s what everybody else is charging for a similar location for my business.

That’s why it’s called fair market value because it’s fair for everybody. When we manage shopping centers, what we tell our landlords is let’s find out what the market rate is and then let’s charge the tenant just slightly below that. And the reason for that is we want to make sure that we are fair with our tenants, that our tenants get the most value they can, that the tenants don’t have to then get up, move their business, potentially lose a lot of the customers, spend a lot of money on the move and setting up a new place for themselves.

And that also helps the landlord retain a tenant for another period of time, whatever the option period is, because the landlord doesn’t want to lose a customer, then they’re going to lose rent and they’re going to have to pay commission to release the space. So it’s in everybody’s best interest to come to a renewal with a good faith and to make sure that the renewal rate is going to be just below the actual market rate that everybody’s paying, because Nobody wants to get up and move.

Nobody wants to spend the cost of moving their business and potentially losing clients and the landlords don’t want to lose money on the vacancy and commissions and setting up the space for the next tenant. So, uh, fair market value is usually that’s the most fair option because that kind of. Puts everybody on the market and a good renewal and a good relationship that keeps going on between the tenant and the landlord.

So, just to recap, you either have an option and don’t have an option in a commercial lease. When we represent the tenant, we always recommend them to ask and try to get a renewal option. The 3 types of renewal options that we see are either by an amount, whether it’s dollar per month, dollar per square foot, or a percentage of an increase.

The second one would be CPI, which is consumer price index. And then the third one is fair market value. Any of you that is going to come across a commercial lease and it’s going to see the fair market value clause. Sometimes it’s simple. A lot of the time, especially for us in Texas, our standard forms have a really long legal language about what happens when we don’t agree of what fair market value is.

And when there is a dispute between or a disagreement between the landlord and the tenant about what is the current market rate. Then landlord doesn’t come up with that number out of thin air. Usually they either do the research or they hire a broker to give them an idea of what the market rate is.

The tenant can do the same thing. So we tell our clients when you’re up for renewal, give us a call. We can help you through the renewal negotiation. We can help you through the renewal understanding what the real market rates are in the market right now. We tell our tenant clients always to give us a call when it’s time for renewal.

In fact, we’re going to be ahead of you and we’re going to call you about six months before your renewal to talk about what are your plans. For the space for your business for the renewal. But, um, even if you’re not our client and you need to get in front of a landlord for a renewal. We always tell tenants, you do want, you do not want to go unarmed into a conversation with somebody that does that for a living, your business is your hair salon, your nail salon, your shoe store, your donut store, your business is your business, and you’re an expert in your business, but you’re not an expert in commercial real estate.

You’re not expert in negotiating leases, but the other side is whether it’s the landlord or it’s the landlord’s representative. That’s what they do for 11. They negotiate commercial leases. So you’re walking in unrepresented into those renewal conversations. You’re putting yourself in a disadvantage. You want to make sure you’re coming armed and you want to make sure that what the market rates are and that any commercial broker can help you with that.

And. Now, if there is a disagreement between the landlord and the tenant about what the market rate really is, then there’s a whole legal language in the fair market value clause in your renewal option that describe what the process is. Usually it requires getting into an arbitration or an appraisal. We hire a third party appraiser to figure it out and so on.

So that you are covered on inside the contract. About how the process is going to be and you don’t just leave that in the hands of, oh, the landlord decided it’s a 2, 000, 000 a square foot and that’s the fair market value. And now I have to pay for it. No, it’s not that dangerous. Let’s just say that. So, to wrap this thing up, if you’re a tenant, we highly recommend you get renewal options, at least 1, if not more.

If you’re a landlord, work with your tenant, make sure you give them longevity, understand their concern that their business wouldn’t be yanked out of place when the first term of the lease is ending. So it’s always great. Plus for the landlord, it’s great for your refi. So when the bank that the lender that is doing your refinance is looking to see, oh, they’re there for a five year lease and it’s been three, but they have another five year option.

Then they see the longevity. They don’t have the risk of in two years that then it’s moving up for sure. So that’s it. My name is Joseph Gozlan. I’m with Eureka Business Group. We specialize in retail and we can help tenants and landlords and investors get in their retail growth in 2025. Give us a call.

Shoot us an email. Our website is ebgtx. com and we’ll be happy to help.