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V O L . X X I I I N O. X I I I J U N E 1 2 , 2 0 1 7 14 G ood or bad, there is no denying that in today's fast-paced, short attention span society, we have a lot of options. Options for television shows. Options for news sources. Options for dinner. Every day we make dozens of decisions. And, while not quite as abundant, there are several options in commercial real estate contracts. ese are important to understand and can have signifi cant impact on the health of your business and, espe- cially, your real estate holdings. e most common option we deal with in commercial real estate is a tenant's renewal option. At the expi- ration of a lease, the tenant has as sole right the ability to extend the lease for an additional period of time. Typically, this requires a certain notifi cation period of six months to the land- lord. It is important to recognize that renewal options are the rights of a tenant, and limit what a landlord can do with the property. ey are legally binding rights and should be given only with great care and forethought in the initial lease negotiations. While very common, they are certainly tenant-friendly leverage points, and an encumbrance on real estate. Understanding your lease rights as landlords or tenants is particularly important in a competitive market like today's. Businesses are seeing very limited relocation opportunities, so staying in place may become a virtual necessity. In addition, moving is costly, and can be prohibitively so. ere is a healthy debate in the commercial real estate world when it comes to setting renewal term lease pricing. In some cases, the rate is defi ned during the initial lease negoti- ation. In other words, the price is fi xed several years in advance. at can be risky for both tenant and landlord depending on market conditions at the time of renewal. e upside is that it allows for clearer budget planning and for a smoother renewal transition. An alternative is to defi ne the renewal lease price "at the market rates." is is obviously a subjective number and can lead to an entirely new round of negotiations between landlord and tenant at the time of renewal. Another common option in commercial real estate is a purchase option. is is sometimes known as a lease-to-own opportunity. Most purchase options have a defi nitive timeframe as to when the option can be exercised. A price is typi- cally defi ned as well. From a property owner's perspective, there are pluses and minuses to this right. e obvi- ous pro is that you get cash fl ow in the form of rent from a tenant until the building is bought. And that cash fl ow is typically not applicable to the purchase price. is also allows the tenant-buyer to get comfortable with the real estate and build capital for the acquisition. e major downside is that a tenant purchase option is another signifi cant encumbrance to real estate in that it survives trans- fer of ownership. In other words, a prospective third party buyer would need to acknowledge and accept the purchase option, which would likely limit the buyer pool. A purchase option is very diff erent from what is commonly called a fi rst right of refusal. e latter is another tenant-friendly clause that guarantees an option to match any third party off er the property owner may receive during the lease term. Rather than a formal option to buy, it is more appro- priately described as a decision to buy if or when someone else is trying to acquire the asset. Right of fi rst refusal creates no obligation for the property owner to sell, unlike a purchase o ption. Decisions abound in navigating commercial real estate transactions. e individual components of a real estate contract are important leverage points for all parties, and should not be considered lightly. As always, it's best to consult an attorney or a trusted commercial real estate broker to better understand these concepts. Now, what's for dinner? J L, a Certifi ed Commercial Investor Member, is a partner and broker at NAI e Dunham Group. He can be reached at @ . Leverage your options B Y J U S T I N L A M O N T A G N E H OW TO At Jensen Baird, our commitment is to you. Maine lawyers. Maine clients. Maine values. Portland / Kennebunk 207-775-7271 • 1-800-756-1166 • jbgh.com We know what our clients need, because we know Maine. Our lawyers understand the unique challenges of living and doing business here. We aren't part of a huge national firm, we're part of the community. And we've been that way for over 60 years. When it comes to business banking, we do the work for you because you're busy running your business. The Breathable Home was able to save me and get more accomplished with our Simply Smart Business Banking. Andrew Silsby, President, Kennebec Savings Bank Nadine Aubuchon, The Breathable Home Go online to see Nadine's video! (207) 622-5801 • www.KennebecSavings.Bank/simply-smart Member FDIC Business Banking. We Make It Easy Understanding your Understanding your Understanding your Understanding your Understanding your Understanding your Understanding your Understanding your Understanding your Understanding your Understanding your Understanding your Understanding your Understanding your lease rights as landlords lease rights as landlords lease rights as landlords lease rights as landlords lease rights as landlords lease rights as landlords lease rights as landlords lease rights as landlords lease rights as landlords lease rights as landlords lease rights as landlords lease rights as landlords lease rights as landlords or tenants is particularly important in a competi- tive market like today's.

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