1. Path of “Least Resistance”: To Exercise a Renewal Option or
Not?
[Conclusion: In our opinion, the entire process is a loser. This type of gambling does not constitute
astute fiduciary duty to one’s shareholders. Our clients enjoy their financial stature resulting from
years of hard, smart work and planning. In an open market transaction, we can negotiate an outcome
to a renewal transaction of far higher quality than through the typically contrived and manipulated
“Fair Market Rent” renewal option provisions and arbitration process. Our clients have leverage and
we know how to use it. Exercising renewal options simply leaves a lot of money---and time---on the
table. And we hate leaving money on the table.]
Face it. Landlords hate giving tenants options of any kind. Whether options
to renew; to expand or contract; to terminate one’s lease; to assign one’s options
to another tenant, etc. However, a tenant with some leverage will command
enough respect to lock in some options---unilateral options. The question is
whether or not a tenant is well served by exercising some of those options-
--versus negotiating around the options in new, arms-length, open
discussions with the landlord. Few tenants exercise these options. And for
good reason.
As tenant-representation specialists, we pride ourselves in creating as much
flexibility for our clients as possible…taking careful note of our client’s needs at
the formulative space programming stage of strategic planning. For discussion
purposes, we’ll focus here on Renewal Options…the criteria which leads to
exercising a renewal option; the viability of those options; and the practical reality
of exercising a potentially irrevocable option.
• At the inception of a lease, why do tenants bother negotiating renewal
options? We expect longevity in our businesses, certainly beyond the
initial “fixed” term of the lease. So, we want to encumber the Premises for
some additional period or periods. The underlying assumption is that
without an option to renew, the landlord will either lease your space to
another party without any obligation to you whatsoever; or potentially
option your space to another party….putting you into 2nd place (or worse)
for a crack at leasing your own space! In either case, a lack of trust in
the landlord drives the requirement for a renewal option---even
though it would likely be in the landlord’s best interest to extend your
coveted tenancy anyway! One simply can’t count on the landlord to do the
“right thing”. But these renewal options are VERY complex, to the point
that the tenant, landlord, brokers and real estate lawyers work arduously
to craft “Fair Market Value” or “Fair Market Rent” terms in the final lease

2. Path of “Least Resistance”: To Exercise a Renewal Option or Not?
By Dan Mihalovich, President, MIHALOVICH PARTNERS
March, 2008
Page 2
document. In spite of all the efforts, are these renewal clauses ever
perfect? Far from it.
• During the negotiation of general business terms of the Letter of Intent,
Tenant and Landlord strike an agreement for a renewal option---with
myriad conditions and complexities. On the face of it, the notion that---
once exercised---the tenant’s renewal lease term will continue at “Fair
Market Rent” for comparable space in comparable buildings. And, if the
parties can’t amicably agree to the new rate within a reasonable period of
time, a “baseball-style” arbitration ensues. This sounds easy enough, but
let the buyer (that’s YOU, tenants!) beware:
(a) Once you’ve exercised your renewal option, the normally
advantageous leverage of open negotiations evaporates. The
parties are relegated to interpreting imperfect language of the lease
to determine what’s “fair”.
(b) The artificial timeline described in the renewal option sets both
parties to a schedule to reach an agreement, yet this timeline
most often serves one side or the other with unfair advantage.
Tenants must give written notice to exercise, frequently 12-15
months in advance of the renewal term commencement date.
Unfortunately, this timing for a final and binding decision by a
tenant usually coincides with the beginning of most tenant’s drive
into the marketplace to determine the value of their tenancy to a
small field of landlords. Most tenants are ill-prepared to make
such an enormous commitment to a renewal so far in advance
of the new term. And, not surprisingly, prospective outside
landlords are rarely prepared to offer aggressive concessions to all
but the largest tenants so far in advance. If a tenant must exercise
a renewal option 12-15 months in advance, then to consider
relocation alternatives instead, a tenant would likely have to receive
binding commitments from an outside landlord 16-18 months
ahead. Unlikely to occur.
(c) Many other challenges dilute the effectiveness of the renewal
option. Once the tenant submits its notice to renew, the renewal
clause will have offered the landlord a period during which they will
formulate their “reasonable” opinion of “fair” rent. After all, it’s so far
in advance of the new term, the landlord needs some time to
contrive the most hideous of lease comparables---those recently
completed transactions---which in the landlord’s view are fitting with
the definition of “fair” in the lease. We cannot describe in this
writing, without volumes, how manipulative the “comps” data

3. Path of “Least Resistance”: To Exercise a Renewal Option or Not?
By Dan Mihalovich, President, MIHALOVICH PARTNERS
March, 2008
Page 3
becomes. Remember that lease transactions are NOT recorded,
publicly. Lease transaction data is often shared between landlords,
landlord-brokers and tenant-brokers---but nevertheless the data is
founded on heresay and is often reported incorrectly. Does the
landlord have an obligation to share its data and substantiate its
claim of “fair” rent? Most frequently, not. The standards of the
lease, however, are founded on the spirit of good faith and fair
dealing. Is the door open for the parties to “cook” the “Fair
Market Rent” clause? Absolutely. Isn’t there great risk to the
tenant, to our clients, subjecting oneself to such a process?
Absolutely.
(d) At the time both Tenant and Landlord strike the initial lease deal, in
all likelihood market conditions will be quite different than when the
renewal option is exercised. Yet the “standard” for renewal
options bases “Fair Market Rent” on an “as-is” renewal for the
period. No tenant improvement allowance is offered; nor downtime
for construction; no allowances for architectural fees or moving
expenses related to any phased renovations of your space;
oftentimes brokerage fees are excluded. But the lease language
may suggest that “fair” rent will take into account some or all of
these concessions, if granted in the comparable transactions in
comparable buildings. By this juncture, however, the leverage
that a tenant would otherwise maintain to negotiate such
allowances for a renovation---or lack of renovation---is
severely diminished. Your ability to secure offsets from your
current landlords becomes a function of concessions given to
other tenants…in deals negotiated by other brokers.
(e) We must underscore the likely pitfalls of subjecting one’s
financial future to outside “comps” at all. Not only are there
authorship issues, insofar as we are likely to negotiate better terms
for our clients than other tenant-representation brokers; but the
notion that a tenant MUST rely on deals already completed
signals a locked-in loss for tenants in a falling market. Why
would a tenant voluntarily subject itself to setting a “fair” rent for the
renewal 12-15 months hence (in a declining market) based on
deals gone by?! Conversely, in a rising market, tenants should
expect landlords to manipulate the comps to reflect only the most
recent and most expensive comps…if there even exists an
obligation for the parties to provide comps. Most renewal clauses
are drafted in a manner which only obligates the landlord to
propose “Fair Market Rent” in their reasonable discretion. In a rising
market, if a single tenant in a single comparable building pays an

4. Path of “Least Resistance”: To Exercise a Renewal Option or Not?
By Dan Mihalovich, President, MIHALOVICH PARTNERS
March, 2008
Page 4
agregious amount of rent….you can expect to hear from your
landlord that that is the “fair” amount. Is the process contrived?
Yes!
(f) For those of you, tenants, who were attracted to your current
space because once upon a time your landlord was under
pressure to rid itself of an extended vacancy; and/or due to an
unusual configuration of the space, perhaps
ineffieciency…….beware that the landlord’s view of the same
space will change markedly during the determination of “Fair
Market Rent” in a renewal! Once the tenant has locked into its
renewal term by exercising its irrevocable option, the games have
begun. All the reasons the space sat idly on the market for months
or years before you signed on are forgotten. The concessions the
landlord made to you at the outset of your lease, because no one
else seriously considered that space….all forgotten. With 20/20
hindsight, one of the most masterful concessions to have
secured in your renewal language would have been the
tenant’s right to rescind its exercise of the renewal option---if
and only if the landlord’s estimate of “Fair Market Rent” is
unacceptable to you. Of course few landlords care to offer this
option to rescind, since…in the landlord’s view…the tenant’s
unilateral right to renew is deemed to be more than sufficient
consideration given.
(g) In the “devious” category: “Fair Market Rent” means fair
market rent for whom? Is the issue, “What will the market bear for
this space, given its as-is condition for the specified length of years,
considering comparable space in comparable buildings?” In other
words, is the issue, “What will any ready, willing and able tenant be
willing to pay….?” Or is the issue, “What should THIS tenant pay for
its specific use in this made-to-order space for THIS tenant?” The
notion of “market” and fair determination of value must be
determined by considering what a reasonable field of tenants would
be willing to pay for such space.
(h) How does one determine the value of an albatross? If a space
is so unusual that its salvage value upon re-leasing to the open
market is ZERO (ie. the space will necessarily have to be
demolished and rebuilt in order to re-lease the space), then the
utility of the space, or lack thereof, must be considered as “Fair
Market Rent” is determined. But in the contrived world of renewal-
option clauses, landlords may surprise and disappoint you with
distorted interpretations of basic English. Generally speaking, if the

5. Path of “Least Resistance”: To Exercise a Renewal Option or Not?
By Dan Mihalovich, President, MIHALOVICH PARTNERS
March, 2008
Page 5
space looks and smells like a pig (you leased the space because it
was a “steal”), it will be slaughtered once you vacate to another
location. On the renewal, however, expect the landlord to perfume
that pig. It’s in their interest to do so and you’ve just locked yourself
into the renewal. Again, buyer beware.
(i) The games continue, ad nauseam. Tenant exerices the renewal
option. Landlord floats their initial “reasonable” rental rate. Shock
sets in. Why? Because the landlord refused to entertain any
discussion about forecasted rent prior to the tenant exercising its
option. After all, the tenant controls the renewal term, not the
landlord. The landlord offered to discuss renewal terms, but only
after the expiration date for the tenant to exercise its renewal
option. The landlord’s shocking salvo appears just at the time the
parties are to enjoy one another’s company in a 30-day (or so)
period of “negotiations”. If the parties can’t agree to terms, or simply
don’t want to, this period will lapse without progress. Typically, what
ensues is another debate----this time between representative-
brokers or appraisers of Tenant and Landlord. Surely they will
resolve the mess, or else! Or else what? Or else both parties risk
turning over complete control to a 3rd broker or appraiser, whose
qualifications are known but oftentimes little more as to how that
person will actually resolve the dispute between the parties. Again,
one must rely on the negotiated and imperfect language of the
lease to spell out the role and process for the 3rd broker/appraiser.
Even if the process were perfect, tenants, how can this contrived
process result in a conservative and controlled determination of
your company’s financial future?
(j) The reliance upon “baseball arbitration” gives comfort to
many a tenant and landlord. In the end, however, the parties
resort to gambling---albeit “educated” gambling. In spite of any
and all previous discussions, negotiations, offers or otherwise, each
party resorts to putting a number into a sealed envelope and
submits it to the 3rd broker/appraiser. Everyone second guesses the
other, including second-guessing the 3rd broker/appraiser. Either
the landlord or tenant loses; or both can lose, actually. In our
opinion, the entire process is a loser. This type of gambling
does not constitute astute fiduciary duty to one’s
shareholders. Our clients enjoy their financial stature resulting
from years of hard, smart work and planning. In an open
market transaction, we can negotiate an outcome to a renewal
transaction of far higher quality than through the typically
contrived and manipulated “Fair Market Rent” renewal option

6. Path of “Least Resistance”: To Exercise a Renewal Option or Not?
By Dan Mihalovich, President, MIHALOVICH PARTNERS
March, 2008
Page 6
provisions and arbitration process. Our clients have leverage
and we know how to use it. Exercising renewal options simply
leaves a lot of money---and time---on the table. And we hate
leaving money on the table.
Dan Mihalovich
President
MIHALOVICH PARTNERS
Tenant Leasing Services
655 Montgomery Street, Suite 810
San Francisco, CA 94111
T: 415-434-2820
C: 415-999-9244
F: 415-434-2830
E: dan@TheSpacePlace.net
W: www.TheSpacePlace.net
Mihalovich Partners, a San Francisco based tenant-representation firm, was formed in 1998 by
Dan Mihalovich. Mr. Mihalovich brings to the firm 29 years of business experience, focusing on
strategic and market analysis, negotiation skills and project management expertise. He has
managed over 200 office-leasing assignments for many of San Francisco's most prestigious
tenants, including The California Academy of Sciences; The Bar Association of San Francisco;
and Wilson, Sonsini, Goodrich & Rosati. His career, and the focus of Mihalovich Partners, is
solely driven to advocate the interests of San Francisco tenants in leasing negotiations of all
types---renewals, relocations, renegotiations, and terminations. To avoid conflicts of interest,
unlike most firms in the leasing brokerage business, Mihalovich Partners never represents
landlords.
Visit our website at www.TheSpacePlace.net to learn more.