One of the most common questions that come up when leasing commercial space is whether a tenant is better off signing a long-term or short-term lease. While there’s no right answer — as every company’s needs are different — there are certain advantages and disadvantages to each that, when carefully analyzed with the help of a commercial broker, can help steer businesses toward the best option for their specific needs.
Benefits of Signing a Long-Term Commercial Lease
With limited flexibility but maximum options, long-term leases are those that are at least five years in duration and best suited for businesses with a clear vision of their future. Both restrictive and flexible in their own way, long term leases reward longevity but can be punitive when the unforeseen occurs.
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.
Benefits of Signing a Short-Term Commercial Lease
Typically between one and three years in length, short-term leases have specific strengths and weaknesses for companies. The rarest of the three options as many landlords are unwilling to sign short term leases, companies should carefully balance their pros and cons to make a fully informed decision that ultimately serves to their benefit rather than impeding their progress. Also, a short-term lease does not lessen the landlord’s requirement to review the financial condition of the tenant.
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 known 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.
