Tenant will do 10 years at $9.25 or 5 at $9.85. Which term do you sign into a market everyone says tightens in 2027?

Before the term question, the option language decides more money than the spread between $9.25 and $9.85. "Fair market" with no mechanism is a coin flip you hand to an arbitrator eight years from now. I want the appraisal process spelled out, comparable set defined by clear height and building size in a named submarket radius, a floor at the prior year's rent, and a deadline structure where the tenant loses the option if notice is late. Without that, the five year deal isn't really five years, it's a ten year deal where the tenant controls the pricing.

Same with the reset in a seven year structure. A reset without a collar can go either direction and lenders price that uncertainty. If you want the tightening upside and financeable term, the reset with a floor at the escalated rent is the version I'd want papered. Your counsel should draft the appraisal mechanics rather than pulling a form clause, because the fallback procedures vary.

The $6 of TI is doing more work than you're giving it credit for. Over ten years that's 60 cents a year against $9.25. Over five it's $1.20 against $9.85, so your effective rents are $8.65 and $8.65. They're the same deal. If leasing commissions land differently on the two terms, the five year one is actually behind.

tally beat me to the effective rent math, so I'll go at the financing side. A five year primary term with a five year option gets underwritten on the five, not the ten, at most lenders I've dealt with. If you're taking permanent debt on this building, the amortization and the term the lender will offer both key off the lease, and a term that runs short of the loan maturity gets you a shorter loan, a reserve, or a lower proceeds number. Confirm what your specific lender does in writing before you sign anything, because the sizing rules differ shop to shop and they change.

Second thing. If you sell in 2029 with 14 months left on a five year lease, you're selling exactly the problem you bought two years ago. The buyer prices rollover risk at whatever the market is scared of that month. With the ten year you sell a bond with six years to go and the argument shifts to whether $10.70 is under market, which is a much nicer argument to have.

The assumption underneath the whole thing is that rent growth beats 3 percent compounding. That's the only reason to take the short term. If you actually believe the absorption rebound and the construction pullback, say so and price it. If you're hedging, the ten year with a CPI-linked bump and a 2.5 percent floor is the honest middle, and the tenant will fight you on the cap side.

Every broker I've shadowed pushes the long term, and their commission is paid on total term, so I discount the advice accordingly.

Does the 3PL's own contract book matter here. If their customer contracts run three years and renew, a ten year real estate commitment is a bigger risk for them than for you, and that might be why they'll pay 60 cents less for it. I'd want to know what they're actually storing in there before I decided who's getting the better end.

Genuine question, why is a ten year lease ever bad. I thought long term tenants were the whole point of industrial.

rigging, the rent is fixed for ten years but the building isn't. That's my whole objection to the long term here.

flint, how old is the roof and what's the membrane. On a rear-load box that age you're likely looking at a full replacement inside the ten year window, and at 31,000 sf you can be into six figures depending on tear-off. If this is a true net lease with the tenant carrying roof and structure, fine, forget I said anything. If you've got a carve-out where you keep structure and the roof, then your $9.25 net isn't $9.25 net in year seven, it's $9.25 minus a reserve you should be funding now.

Same with the dock equipment. Levelers, seals, bumpers on a 3PL running heavy turns get beaten up fast, and who repairs versus who replaces is the sentence that ends up in dispute. I'd rather negotiate that language than the 60 cents.

I'm still learning how this feeds valuation, so tell me if I've got this wrong. If the exit cap is the same either way, then the ten year deal at $9.25 growing 3 percent gives you a lower NOI at sale than the five year at $9.85 growing 3.5, so the short lease is worth more per square foot on paper. But fathom's point is that the cap won't be the same because the buyer charges you for the rollover. So the question is whether the cap penalty for short term is bigger than the NOI gap. Is there a rule of thumb for what the market charges, or is it purely deal by deal.

I sign leases as the tenant, and I'd never take ten years without an early termination or a contraction right. My shop signed seven once and outgrew the space in year three, and subleasing it cost me more attention than the business could spare. So if this 3PL is offering ten flat with no outs, either they're very confident in their volumes or someone told them long term gets them a discount and they're taking it. flint, ask them what happens to their footprint if they lose their biggest account. Their answer tells you how real the ten years is, because a lease is only as long as the tenant's ability to pay it.

Managing these, the number nobody puts in the spreadsheet is downtime. When your five year term ends and they leave, budget eight to twelve months of vacancy plus new TI plus a full commission, and in a submarket where new supply is still delivering it can run longer. On 31,000 sf that swallows the 60 cent premium several times over.

But the flip side is real too. I've got an owner who locked a modern box on a long term with soft bumps back when everyone thought rents had peaked, and he's been watching renewals down the street clear well above his contract rent for three years now. There's no way out of that. He just collects and grinds his teeth.

What pushes me toward term is the tenant type. A 3PL in an infill location near a port road with racking installed and a customer base tied to that geography doesn't move casually. The relocation cost is what protects your renewal, and that's the same reason you can push them at reset. I voted for the seven with a hard reset, assuming warrant's appraisal mechanics actually get drafted properly.