Tenants don’t often spend a lot of time on the renewal option provisions of commercial leases during negotiations. Though these provisions are seem to be for the tenants’ benefit, many tenants are satisfied that the lease provides for the agreed upon option with out giving much thought as to what their choices will be at the end of the lease term. I suppose this short term thinking comes from the fact that people generally don’t like change and to move your business is very unappealing and disruptive. However, if a tenant is careful and able to get some favorable language in the renewal provisions, as the expiration of the initial term approaches, the tenant will have time to properly evaluate whether to extend the lease or to sign a lease for space at another property.
The first thing to watch for relating to the renewal option is the time to exercise the right. Landlords generally look for a short window to exercise, about a year prior to the end of the term. The window itself should not be that important to tenant as long that tenant properly calendars the dates and begins to research options far enough in advance of the notice period to make an educated decision and complete negotiations with a new landlord or the current landlord. However, tenants should strive to negotiate for the window to exercise the renewal option to be at least 6 months long. The time to exercise the option is usually around a year prior to the end of the term and the window falls around the 1-year mark.
Rent during the renewal term is the next key point. Landlords don’t like to lock themselves in here. While rent during the initial term usually increases a fixed amount year to year or on fixed dates or intervals, landlords like to reset rent at the beginning of the renewal term. Sometimes lease drafts have language saying that rent will be determined at the start of the renewal term. Tenants should never agree to this clause. That is a blank check for the landlord. A more common clause is to reset rent a fair market value (FMV). This could be a blank check as well if FMV is not carefully defined or capped. There is no right answer as to the definition of FMV. Sometimes appraisers or brokers’ professional opinions (BPO’s) are used. Still, you need to define what geographical area, class of property, rent incentives and other factors can be included in the determination of FMV. Many landlords put a floor on rent, i.e., rent at the beginning of the renewal term can not be lower than rent for the last year of the initial term. Whenever a FMV provision is included, I try to place a cap on the reset. Sometimes, I try to convince the landlord to move away from FMV and instead, change the first year renewal rent to the increase in CPI from the last year of the initial term. You also need to look at rent for the remainder of the renewal term and make sure that the reset does not happen every year. I have encountered this on more than 1 occasion.
CAM increases during renewals need to be addressed. The base year for CAM increases should be re-set to the 1st year of the renewal term.
Tenants should pay attention to the renewal option language in the lease prior to signing. Planning for the future should begin immediately. A poorly drafted renewal option provision could limit a tenant’s choices years down the road. Thinking ahead could give a tenant leverage.
RentCase and Market Watch recently completed a study as to the cost of rental prices near NHL hockey arenas. Cities and team owners continue to grapple about public funding for stadiums and arenas. Public financing proponents often argue that stadiums and arenas are economic engines, attracting business and growth. While this study, and a similar one for Major League Baseball (see my prior post Here) focus on the correlation between rents and stadiums/arenas, the housing arguments follows business and growth.
But do arenas and stadiums really act as a draw for economic growth? The hockey study focuses on NHL only arenas – arenas not shared with NBA teams – and looked at rentals of 50 plus units within a 2-mile radius of the arena as compared to the rest of the city. Leading the League was the Columbus Blue Jackets where units near Nationwide Arena rent at an average of $1,394 per month or 69% higher than the average rent city wide of $803. The arena having the least affect on rents is PNC Arena in Raleigh, North Carolina, home of the Carolina Hurricanes. There, the average rent is $1,064 near the arena versus $1,029 city wide, a 3% premium. Interestingly, both Columbus and Raleigh are college towns and state capitols. I don’t know what, if any, connection there is.
Florida is home to 2 hockey teams, the Tampa Bay Lightning and the Florida Panthers. The Lightning plays its home games in Tampa and the Panthers play in Sunrise, which is in suburban Broward County, west of Ft. Lauderdale. Average rent near the 2 arenas is nearly identical, $1,822 in Tampa and $1,820 in Sunrise. But in Tampa, average rent city wide is only $1,103 meaning that arena area rent is 65% higher than the average city rent. Sunrise’s average city rent is $1,491 making the arena premium only 22%. Do the arenas make any difference in these cases? Probably not. Tampa’s Amalie Arena is located in downtown and Tampa itself is an urban center. Average rents are skewed by lower income housing throughout the city. The Panthers’ BB&T Center in suburban Sunrise is directly across the street from Sawgrass Mills, one of the largest malls in the country. Sunrise is a middle class community located on the edge of the Everglades and its rental stock is newer, particularly near the arena and Sawgrass Mills. If anything, Sawgrass Mills is the draw, not the arena. It is a major South Florida tourist attraction.
As with the baseball study, location of the arenas and team history and success will affect surrounding development more than the stadium itself. That in turn will affect housing costs and rent. This is not a power play for hockey this time.
Does living near a Major League Baseball stadium affect the cost of housing in a city? Trulia recently compared the cost of ownership and rentals of homes within one mile of US MLB stadiums to the median cost in the surrounding metropolitan areas. Trulia Found that the cost to own and rent was higher in the areas surrounding 18 of 29 US baseball stadiums. In Miami and Tampa Bay, Florida’s two MLB cities, it is cheaper to live near the ballpark than the median cost elsewhere in the area.
Yankee Stadium is the most expensive stadium in baseball to live near as compared to the median cost of ownership. The median value near the House that Ruth Built is $740,000 while the median home value in the New York metropolitan area is $407,000. O.co.Coleseum in Oakland is at the other end of the list. The median home value near the stadium is $275,000 while the regional value is $634,000. In Florida, Marlins Park in Miami, housing can be found at a median value of $162,000 compared to $250,000 in the metro area. In Tampa Bay, Tropicana Field area values come in at $106,000 while the median metro area value is $164,000.
The cheapest place to rent in baseball near a stadium is Kansas City, Missouri. Median rent in walking distance to Kauffman Stadium is $850 per month whereas median rent in the KC area is $1,295 per month. On the other end of that scale, Houston Astros fans would pay the highest rent per month to live close to Minute Maid Park; $2,100 per month. Houston area rents come in at $1,600 per month. Marlins fans can rent near the park for about $1,625 per month and elsewhere in the city for $1,915 per month. Rays fans do better at $1,200 per month as compared to $1,350 per month metro wide.
Is there a lesson to be learned? Trulia reports that of the 14 stadiums built since 1999, only 2, Marlins Park and Miller Park in Milwaukee, have home values lower than the metropolitan areas. Teams have long argued that stadiums bring redevelopment and higher property values to cities. Trulia’s housing study might support that argument, but the Marlins and Brewers have not had consistently winning teams since their stadiums were built. Perhaps the redevelopment comes not when the stadiums are built, but when there is success on the field.
Since the recession, the shift to rentals has increased. According to Trulia, since 2006, prior to the recession, the percentage of renters nationwide has increased from 36.1% of US households to 41.1% in 2014. Homeowners have decreased from 65% to 60%. The increase in renters is occurring despite historically low interest rates and ever increasing rents.
The numbers are greater in South Florida. 47.2% of households in Miami are renters. However only 32.6% of West Palm Beach households rent. But, the cost to rent is very high. In Miami, 39.6% of income is spent on rent, Ft. Lauderdale, the number drops to 35.2% and in West Palm, 34.3%. Orlando, only 32.3% of income goes to rent. In contrast, San Francisco renters spend only 27.3% of their income on rent. However, median rent for a one-bedroom apartment in the City by the Bay is a whopping $3,670 per month as of March 1 according to the Zumper Report, the costliest in the nation. Miami checks in 9th at $1,840 for a one-bedroom.
An October, 2015 Trulia Study found that it was 45% cheaper to purchase a home in Miami-Dade County than to rent and 44% cheaper in Broward County. The study assumed a 10% down payment and the median home purchase price. So why do people continue to rent at these very high prices? See my January 11, 2016 post, Rising Interest Rates Highlight Need For New Mortgage Products. An over riding problem facing potential homeowners is the ability to save for down payments. Closing costs, even a 10% down payment on a “starter house” or condominium, particularly in a market like South Florida, can be difficult to achieve. And, when over 35% of income is being spent on rent, savings are virtually impossible.
More access to low down payment loan options and better marketing of these kind of loan programs is necessary to alleviate rental burden so many people face.