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Homework answers / question archive / Suppose that you have a commercial property and an important anchor tenant has a lease that is about to expire
Suppose that you have a commercial property and an important anchor tenant has a lease that is about to expire. With the lease soon expiring, you are trying to decide on your negotiation strategy. The property is in an area in the early stages of gentrification – that is, the neighborhood is improving due to renovation and an increasing share of prominent businesses (which generally leads to increasing property values).
However, there has been a recent increase of crime in nearby. If crime rates don’t scare away investors, gentrification will continue and your potential rents will go up. However, if crime gets worse, your potential for rents will drastically decrease.
The anchor tenant does not want to pay an increase in rent, and is willing to sign a long-term lease at the current rate. If they move out, other tenants may follow and the vacant space could possibly attract more crime to the area, due to the fact that that space is sitting empty and fewer people are around.
Which of the following options for tenancy would you try to work out with your tenant and why?
Option 1: Try to lock the tenant in on a long-term lease (tenancy for years) with no increase in rent to keep the anchor tenant and protect yourself from potential vacancies.
Option 2: Agree with the tenant on a tenancy from year to year (periodic tenancy), and see where the market is a year from now.
Option 3: Allow a holdover lease (or tenancy at sufferance where the tenant would still be bound by the terms of the current lease) while trying to negotiate a lease with the rents you would like to receive. If you find another anchor tenant, this would allow you to evict the current tenant at any time.
Periodic lease agreement
The most fundamental aspect between the property owner and the lessee is for both of them to be able to observe the terms and conditions agreed on in the lease agreement form. The property owner and the tenant should adhere to the mutual binding agreements on the period of the lease, use of property, utilities, and furnishings among others.
In case a lease agreement ends, the property owner can give notice to the tenant to vacate the property. However, the tenant and the property owner can agree on the renewal of the contract or engaging in a new contract for example month-to-month tenancy. The tenant is not allowed to rent or re-rent a property to an unqualified tenant however, he has to way options and takes reasonable precautions before re-renting the property.
In an area where there is a crime, a property owner ought to innovate new ways to keep his property under occupancy. An area needs people to develop and for a developing environment guarantee of security is a necessity. Tenants vacating the place puts the area at risk of other people considering the area since crime increase will be at per.
Allowing a periodic tenancy is an appropriate way since it serves both the parties, keeping the tenant as well as allowing the property owner to negotiate with other prospective tenants willing to pay the expected rent. The tenant may establish year-to-year lease clauses that allow the property owner to examine the property value as time goes by. Both the tenant and the owner will be in a win-win situation considering the property value at a given time,
It is easier to get a new tenant since the value attached to the property will not be overpriced. In a developed area, tenants will attach the value of the property to developments around. This will give the tenant an option to increase rents considering the growth of the area. This will therefore allow the owner to give the property time to add value as well as keep the tenant, therefore, reducing the crime rates, Kotler P (1999).
However, if the crime rate increases, the value of the property will go down. The area will have fewer developments and the tenants will vacate the premises. Even so, the government may come in to find means of curbing the challenges
In1890s the crime rates in New York City especially violent crimes declined by 56%. The property crimes in the area reduced by 65% t, which has led to luxury housing developments in Manhattan value including Billionaires Row which has increased business in the real estate market and enabled new investors to come in.
