Commercial Lease: Short-Term or Long-Term?

The length of time someone considers a short-term or a long-term lease may vary on individual perspectives. But on average, a short-term lease typically is any term under three (3) years, while long term leases range from five to ten (5 -10) years and onwards. Some professionals within the real estate industry often tag the time within these two periods as medium term.

Let’s focus on the differences between short-term and long-term leases discussing both their advantages and disadvantages. Finding the right lease span for you and your business vary on your needs and potential growth. This article will guide you to choose which among the two suits your needs and the anticipated direction your business may take.

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Advantages of Short-Term Leases

Less commitment, Less Risk

Short-term lease is perfect for startup business which is still unable to commit to longer lease agreements. Opting for a short-term lease agreement reduces financial risk for these startup businesses. With this, business owners can also venture on experimental endeavors with relatively lower risk.

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Flexibility & Contingency

Growth is what a business pursues to attain, and often, this involves expansion in space, workforce, or service coverage based on how finances are turning out.

Should your business need space expansion to cater to your growing demands in the future, it is relatively easier for you to transfer to a much bigger or more efficient location with a short-term lease.

For businesses that may not be fortunate enough in their run and decide to stop operations and shut down, short-term leases can also provide easier and much faster freedom from rent expenses.

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Disadvantages of Short-Term Leases

Lack of security

Simply put, landlords prefer long-term leases than short-term ones as the former generates security in cash flow for a longer period of time. With this being said, leasing on a short-term basis puts you on a vulnerable position for possible eviction once your lease expires and your landlord decides to lease your current location to an entirely new long-term tenant or a long-term tenant expanding their business.

Therefore, if you are getting more serious and invested on your business, a short-term lease is not for you since it entails uncertainty on your business, additional stress to you as a business owner, and the potential inconvenience of finding and moving your business to a new location.

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Moving costs and business instability

Take note: transferring to a new location can be costly. Furthermore, transferring to a new location affects your business stability, as it can lose a portion of your established clients or customers and will also require you the additional time, effort, and resources to re-establish your business at your new location.

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Higher costs

Yes. Short-term leases are higher in cost compared to long-term leases. This goes back to the notion that landlords get more security in terms of cash flow with long-term leases. Therefore, landlords, as business owners that they also are, often charge higher rates for short-term leases. Rates may also be affected by the current market, which means that your rental rates can increase every renewal based on current market standards.

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Financial unpredictability

With short-term lease rental rates dependent on market standards, there is much unpredictability on the amount you need to shell out. Not having a definite amount for rent can limit your strategies and interfere with your financial plan.

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Limited Negotiating Power

If we have not yet established landlords’ preference for long-term leases over short-term ones, then here is another reason that puts short-term lease on a disadvantage from its long-term counterpart.

Short-term tenants are rarely granted their requests or demands, including expansion, renovation, cost sharing, etc. This is not to say that short-term tenants cannot negotiate. However, as compared to the highly favoured long-term tenants, short-term ones are perceived by landlords as less valuable due to lesser time of tenure.

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Advantages of Long-Term Lease

We’ve quite established how landlords prefer long-term lease over short-term ones, and the many perks that come with this preference. But let us dig deeper into the pros and cons of long-term lease to help you decide whether this is the best-suited one for you.

Lower costs & easier to find

One of the major advantages of long-term lease is lower rental rates. Since long-term lease generates security of steady cash flow for a long period of time to landlords, many landlords are leasing their commercial real estate properties for relatively lower costs. Furthermore, long-term lease agreements also spare you, the tenant, from rate fluctuations, ensuring a definite amount paid all throughout the time of lease.

Additionally, since this is preferred by landlords, they often welcome long-term tenants with open arms, willingly evicting short-term tenants for those who can commit for a long run.

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Anticipate Rental Costs

With long-term lease, you will be able to anticipate your rental costs and can efficiently plan out your finances and business strategies for a long run, regardless of market rate standards.

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Better Negotiating Power

Landlords put so much value on long-term tenants that they are privileged with certain negotiation power. Demands, requests, and forwarded terms, such as renewal options, expansion options, renovations, cost sharing, subleasing, etc., are often granted, along with additional perks, like free covered parking.

Remember: from a landlord’s point of view, a long-term tenant is for keeps. As much as possible, they want to maintain a good relationship with long-term tenants than go through the entire process of looking for a new one.

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Business stability

Once you sign for a long-term lease, you get to run your business with peace of mind, not having to worry about eviction and moving to another location, even after your lease expires. With long-term lease, you can effectively establish your business on your location and work to steadily grow your operations. Furthermore, long-term leases can provide security. If the property is sold by the landlord, you are still ensured that you can retain your spot until the lease expires.

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Disadvantages of Long-Term Lease

Bound for years

This is a matter of perspective. While being secured of space for a long time can be seen as an advantage, it can also have negative implications. You cannot easily move to another location when unforeseen changes force you to do so. Terminating lease agreements or paying for the remaining time within the agreement may cost you a huge sum of money.

You need to understand that a long-term lease is a financial risk that you need to carefully examine before deciding to take, taking into consideration both possibilities of success and failure.

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Complex negotiations

While long-term tenants have more privilege in the negotiation table as compared to short-term ones, the process is more complex and tedious, therefore, taking both parties longer time to settle on agreed terms.

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Limited terms for expansion, unless otherwise provided

Finally, you need to carefully examine the terms within the agreement to ensure that you, the tenant, and the physical space, are both viable for expansion if ever your business needs it in the future. Otherwise, you may need to find a bigger or better space in the future to cater to the needs of your growth.

All in all, both options have their own benefits and disadvantages. Deciding which option is best for your business is a matter of thoroughly studying your financial capacity, business needs, and potential up/downscaling in order to reduce, if not totally eliminate, your risks.

Even after outlining all the information above, leasing commercial real estate (CRE) can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your leasing goals. Contact us at (480) 330-8897 or send us an email at [email protected].

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Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!

Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.

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Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE

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