One of the most common questions I get asked is whether a business should sign a long term commercial real estate lease or a short term lease. For a small business or startup that is renting office, retail, or warehouse space getting this right is important as the success or failure of the business could be determined by the decision. Unfortunately there is no wrong or right answer as every company has different needs. Short and long term commercial leases both have certain advantages and disadvantages that you should analyze and discuss with your commercial real estate agent before you begin negotiations with a potential landlord.
Advantages of a Long-Term Commercial Real Estate Lease
- More Leverage in Negotiations – You have the ability to negotiate better concessions such as a lower initial rental rate, lower annual rental increases, more money for tenant improvements, free rent, renewal options, and expansion options such as right of first refusal/offer. The longer the landlord has to recoup their initial rental costs the more concessions they typically will concede to. Concessions are possible with short term leases however harder to negotiate.
- Predictable Rental Costs – You will be able to lock in rates and forecast rent costs since you will know exactly what your rents will be from year to year during the lease term regardless of existing market conditions. With shorter lease terms you will likely be paying premium rents and higher yearly increases.
- Better Able to Plan for Future – Longer term commercial lease ensures you will be able to stay in one location for a set time period. It doesn't matter if the building is sold you will have the peace of mind of not having to deal with office space stuff for a few years.
Cons of Long Term Commercial Leases
- Takes Longer to Negotiate – Longer leases can be more complex and cause negotiations to last a bit longer
- Less Flexible – Unless you negotiate to have some solid expansion or renewal options if you end up growing too quickly there may not be any space available for you to expand into. This means your only option will be to sublease the space and relocate. If you go out of business you will be stuck with trying to get out of the lease.
Advantages of a Short-Term Commercial Real Estate Lease
- Flexibility – For startup companies or business that are growing quickly you never know if and when you will need more or less space. If you decide you don't like a particular location or space or you get that big deal and need to hire 30 more people you can easily pick up and relocate with a short term lease.
- Contingency – It's a know fact that most companies fail within the first 12-24 months of being in business. Having a short term lease will give you the ability to cut your losses and not have to pay the landlord a large sum of money to cancel the lease.
Cons of Short Term Commercial Leases
- Future Plans Less Predictable – When you are in a short term lease you typically are not able to negotiate renewal or expansion options which means the landlord can lease the space to someone else after your lease expires.
- Rents Typically Higher – The landlord may charge a premium on rent with a short term lease especially in a hot market.
- Less Negotiation Leverage – You won't have as much leverage to negotiate rental concessions such as free rent, tenant improvement allowances, etc.
- Hard to Find Space – In a hot market many landlords will not do short term lease deals which makes finding short term office space very difficult.
As you can see there are many Pros and Cons to signing short term and long term commercial leases. It's hard to do however it's important that you think of your business needs 1, 2, 3, 4, and 5 years down the road. If you are not sure you want to remain in the same location or expect future growth, or are just uncertain about the future of the company then a short term lease might be the best option. If your business is more established, financially stable, and not expecting to expand rapidly then you are better suited for a longer term commercial real estate lease.