Short-Term vs. Long-Term Leases: Which One is Best for Your Business?
If you’ve found the right commercial space for your business, then you’re about halfway home. Now, with the help of a broker, you need to negotiate the best possible lease agreement with the landlord. An important part of that process involves deciding whether it’s better to sign a short-term lease—one to five years—or a long-term lease, ten years or more. Let’s consider the advantages and disadvantages of both in the context of your current and future business needs.
The Short-Term Lease Advantages
First, a short-term lease offers greater flexibility. For a startup or a company that does not yet have a lengthy track record, a limited term can be advantageous in case you must relocate to another market, downsize, expand or cut your losses and close without the financial burden of having to cover unpaid rent.
Do you need to get into a new office or retail space quickly? If so, short-term leases aren’t as complicated as longer ones, so the negotiations tend to take less time. Therefore, the process will go faster and you’ll be able to move in sooner.
Finally, a short-term commitment does not typically require a tenant to address any maintenance concerns, a responsibility that a new company may not want to shoulder.
Disadvantages of a Short-Term Lease
The advantage of flexibility is a privilege that costs, so generally the rent for a short-term lease is higher than with a longer lease. In addition, a landlord will want to recoup leasing expenses such as realtors’ commissions, legal fees and any tenant improvement. These are usually passed along to the tenant as higher rent.
You’ll also need to consider expenses associated with relocating when the lease is up. Some landlords are open to the idea of signing a short-term lease with an option to renew for another year or two. Of course, the rent will increase, but you’ll be able to stay where you are if business is going well and not incur the cost of a move.
Another disadvantage of a short-term lease is that you’ll have less leverage during negotiations. Minus the security of a long-term lease, a landlord may not be willing to include tenant improvement allowances, rental concessions and renewal or expansion options. Without these options in a lease, the landlord is free to rent the space to another company after your lease ends.
A Long-Term Lease’s Advantages
Budgeting and planning for the future are more predictable when you’ve signed a contract stating exactly what your rent will be for several years. You won’t need to worry about increases regardless of changes in the market or building ownership. Furthermore, landlords are typically willing to lower rental rates on long-term leases.
In addition, if you’re willing to commit long-term, then your landlord is likely to be more amenable to negotiating concessions beyond the rent. You and your commercial real estate broker may be able to negotiate lower annual rent increases, more money for tenant improvements, and options to renew or expand, including the right of first refusal. Finally, staying in the same location for a considerable amount of time could help you build a loyal client base for your company.
Disadvantages of a Long-Term Lease
The qualities that make a long-term lease attractive to one business owner can be disadvantages to another. Obviously first is the fact that you are stuck with the lease for a significant number of years—even if the business venture doesn’t go as well as expected in the location. Careful planning may still not account for an unexpected market change or economic downturn.
Conversely, what if your company is extremely successful and outgrows your location more quickly than you anticipated? Then you’ll need to rent additional space in the same building or elsewhere. If moving is unavoidable, then a sublease might be possible, but any option you choose will be an additional expense.
Also, long-term leases tend to be more complex. Therefore, negotiations will probably take more time. This could be a factor if you need to move quickly from your current location.
Considerations When Choosing a Short-Term or Long-Term Lease
When deciding between a short-term and a long-term lease, you’re aiming for balance. Naturally, you want concessions from the landlord and the ability to control the space for the length of time that suits your needs. On the other hand, a certain amount of flexibility is necessary in case you need to relocate. Therefore, you must think critically about your company’s goals, objectives and outlook. The right broker can help with a business analysis, the search for commercial space and negotiating the best lease term for your company.