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 â€“ 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 donâ€™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.