Deciding on how long your commercial real estate lease term length should be is a delicate balancing act. On one hand you want to get as many concessions from the landlord as possible and maximize your ability to control the space for as long as you need it. On the other hand, you need the ability and flexibility to move out if the space does not meet your needs anymore. Choosing the the commercial lease term that makes the most sense for your company takes careful thought about your current and future business needs.
How Long A Commercial Lease Your Landlord Wants
Your landlord wants to receive highest possible rent for as long as possible. In a perfect world if they could get you to sign a 10 year lease or longer they would. Average commercial lease lengths are 3-5 years, however it’s contingent on market conditions, the existing condition of the space, your credit, and the scope of tenant improvements needed. In a hot market landlords are going to push for a minimum of 3-5 year leases. If a lot of tenant improvements are needed and you are expecting the landlord to pay for most or all of it then expect to sign a 3-5 year lease or longer. The reason why is that they need more time to recoup their initial investment. There is no way for them to do that if you only sign a 12 month lease. It’s important that you or your commercial real estate agent understand the landlords needs to ensure that the building and space will accommodate your needs.
How Long a Commercial Lease a Tenant Wants
When determining how long of a commercial lease term to sign there are several factors to consider:
- Your existing business situation. Are you a startup that does not know if things will work out, or are you an existing stable business with consistent income?
- Ideal location. Some locations are more desirable than others which will require longer lease terms.
- The monthly rent. Sometimes if you are willing to pay a higher rent the landlord may consider a shorter term. Paying a higher rate for a space would cost much less then having to pay for a space for 24 months longer than you actually need it.
- Concessions like tenant improvement allowances, free rent, options to expand such as right of first refusals, etc. The longer the lease the more leverage you have to negotiate concessions.
If you are a new business or startup you may seek a short term commercial lease agreement (e.g. less than 3 years). That way if things don’t work out you are not stuck with a lot of lease term to pay for. Keep in mind that a shorter lease term typically means you will have less leverage to negotiate concessions such as tenant improvements or rent discounts. Depending on the space and building you are interested your only option maybe a 3-5 year lease or longer. If the space needs a lot of build out and you are asking the landlord to pay for most of that then expect to have to sign a longer term lease. If the market is hot and there is a lot of interest in the space you want then expect to have to sign a longer lease.
Ideally you want to try to negotiate a commercial lease term that is less than the amount of time that you need it, however with options to renew and/or expand that will carry you beyond the time that you need it. For example a 5 year lease with a 3-5 year option to renew. If you are in doubt of the longevity of your business then stick to shorter business lease terms. If your business is stable with consistent sales then there is no reason to unnecessarily sign short term office leases because you will end up paying a premium to do so.
With the right help from a tenant representative you will be able to evaluate your current needs and determine the right commercial lease term for your company.