Written by Christina Ott
If you are a business owner, you probably already know that deciding the terms for your business lease can be difficult and include a number of important factors.
Certain industries demand stability in their locations, while others can be more flexible. Your unique business needs will contribute to your mobility and desire to change locations. Today, we explore the considerations for choosing a short-term lease or a long-term lease.
Understanding landlord motivations
Most landlords want to eliminate or reduce risk. A longer term provides stability in their rent roll, or tenant list. To a landlord; a long-term tenant = a stable rent roll = predictable future income stream.
Landlords also have reputations to uphold, which compels them to attract new tenants to their properties.
Landlords’ reputations can be compromised by tenants who are frequently moving into, and out of, their buildings. Landlords are generally motivated to keep tenants because:
- It is a positive sign for both landlords and investors
- Moving can be expensive and tiresome
- Tenant move-out equates to leasing costs (making the space ready for a new tenant, marketing costs and other leasing costs)
A tenant that grows within the property is a benefit for both the tenant and the landlord.
Why you may want a shorter lease term
Although a long-term lease is more attractive to your landlord, it may not always suit your business. Business owners who are looking to lease office space may not want to commit to a long-term lease or may be hesitant of the current market rates.
Businesses that require flexibility and that have uncertain prospects for growth may benefit from a shorter-term lease.
Reach a compromise with your landlord if you need flexibility during unpredictable growth.
A short-term lease may look like the best option for a business needing flexibility or a business that cannot predict their future growth. A short-term lease is not the only option to maintain flexibility. A short-term lease usually means increases in rental rate and a landlord typically reserves additional leasing rights for a longer-term tenant. The increased rental rate and reduced leasing rights can mean missed opportunity for your business.
A broker can help a tenant build flexibility in a lease through expansion rights. Think about asking for the right of first refusal, or an expansion option. Adding a provision that if the landlord cannot accommodate the growth, the tenant has the right to terminate the lease can help mitigate the risk of outgrowing the space. A landlord will ask for a longer lease term in exchange for these additional lease rights, but it also allows business owners the negotiating power of a longer-term tenant without the fear of being stuck in too small of a space.
If your business growth is too uncertain and a short-term lease is the best option, you need to be aware that your number of leasing options will decline. You may, instead, benefit from a co-working space or executive suite until you have more clarity about the future of your business. These temporary spaces offer maximum flexibility, but they are often more expensive because of the high turnover rates and the operation costs.
What if you are hesitant about the current market rates?
To a landlord, shorter terms mean a higher risk of vacancy. Landlords will provide incentives to tenants for longer lease terms. For a tenant lengthening the lease term means increased negotiating power.
Using additional term as your leverage a tenant can request benefits such as:
- Lower rental rent
- Higher tenant improvement allowances
- Additional rent abatement
- Parking abatement
- Other leasing rights (expansion options, renewal options, reserved parking spaces, etc.)
Locking in a low rental rate during or after a market downturn can be advantageous for your business, but what if you leased during an upturn and want to renegotiate your rent? Hiring a broker to review and possibly renegotiate your current situation can prove cost-efficient. Know that extending the term of your lease offers leverage during these renegotiations.
Brokers, who are experts in market conditions, know about comparable lease rates to rent commercial property throughout your area. They are negotiation experts that help you as a tenant understand your landlord’s motivations. Their utmost responsibility is to advise their tenant and advocate for them during lease negotiations with the goal to position their client’s business for success. Brokers understand that every commercial landlord is motivated differently. Some landlords prefer to charge higher face rental rates, but they are willing to offer larger concession packages such as tenant improvement allowances or rental abatement, while others prefer to spend less at the beginning and will agree to a lower rental rate in exchange for smaller tenant improvement allowances or less rental abatement.
Are you avoiding committing to an office lease?
Many of our clients are worried about being committed to a longer-term lease, especially if they are new to the marketplace or their business operates in a fluctuating market. Brokers can help in these situations by working with the tenant to renegotiate the lease as the market changes.
Business owners should understand that there are many options when it comes to your commercial lease. Brokers also assist with subleasing your current space to recover some of your current commitment or can help you downsize your current space by adding term or leveraging your landlord’s desire to keep you as a tenant.
Choosing the length of your lease is ultimately an internal business decision. There can be substantial benefits to a longer lease term. Brokers can help you determine your options and the best lease term for your business. If you are deciding between a short-term vs. a long-term office space lease, having a broker in your corner can help you determine your options and make a great real estate decision.
Read more of our blogs to learn more about short-term and long-term leases.