Most landlords prefer signing long-term leases because it’s challenging to find tenants. Landlords would like to keep a good tenant for as long as possible. As a business owner, you may not be ready to sign a 10-year lease. How long of a lease should you sign? Should you ask for a shorter agreement or sign a long-term lease?
Lease negotiations can be stressful for both parties. As the property owner, the landlord wants to recoup their investment in the space and any renovations made for the tenant. On the other hand, tenants want flexibility and concessions in an agreement. New companies may wish for a shorter commercial lease or more opportunities to customize the space as they grow.
The right lease term for your business depends on your goals and financial standing. Businesses at different stages of growth benefit from short-term, standard and long-term leases. In this article, we weigh the pros and cons of commercial lease lengths.
Short-term Commercial Lease Agreements
In the world of commercial real estate, short-term leases are a rarity. Signing a lease of three years or less is a low-risk commitment compared to signing a 10-year lease. Short-term leases give tenants the flexibility to move as their businesses change.
For startups, a shorter lease ensures you won’t be stuck if the business fails. You can opt to renew when the term ends or walk away. If you sign a one-year lease, you can extend your lease after 12 months if the landlord offers a renewal. Tenants should discuss renewal options with their landlord and have the option written into the lease.
Benefits of Short-term Commercial Leases
- Short-term leases are great for startups or companies expecting to grow quickly.
- Short-term leases allow tenants to pivot based on their success. Businesses can scale up or down easily.
- If you need a space now, a short-term lease can help you get into a space sooner. Properties with short-term leases are ready for move-in.
Disadvantages of Short-term Commercial Leases
- Landlords won’t let you customize the space if they’re offering a short-term lease. Since you’ll only be there for a short time, the landlord will have to look for another tenant soon.
- You won’t receive any special concessions or perks with a short-term lease, like free rent months or reserved parking.
- Both you and the landlord will have to repeat the search and negotiation processes in the near future. Your office or storefront will have to relocate sooner, costing you time and money. New stationary, phone and internet installation, moving costs and business disruption can be a high cost.
- If occupancy levels are high, the landlord has a negotiating upper hand. You could end up with no space to move to and a landlord that will be able to obtain the highest rent.
Who Should Sign a Short-term Lease?
Short-term leases are best for new businesses projecting growth soon. If this is your first business, a short-term lease gives you peace of mind in case it doesn’t work out. You may want a shorter lease to start if you’re looking for an office or warehouse property. The location of these spaces may not be as important to the business.
The landlord may ask for a higher rent for shorter terms as the space will have to be painted and cleaned when you move out.
Standard Commercial Lease Agreements
A standard commercial lease is about three to five years. As a middle ground between short and long leases, standard commercial leases bring the best of both together. Standard lease agreements give tenants some flexibility in negotiations and the ability to move in the future.
If you like the space, you can renew your lease at the end of the term. For example, a tenant and landlord may agree to a five-year lease with a five-year option to renew. At the end of the first five years, the tenant is given the chance to continue the lease for another five years.
If you think you may renew, be sure to bring up extension provisions with your landlord. Extension lease rates may be negotiated in advance. During high inflation rates, the rate may simply be market rents at the time of renewal.
Benefits of Standard Commercial Leases
- Standard commercial leases often include improvement allowances, though they may be limited. You will be able to make small adjustments to the space.
- You won’t be locked into a long-term lease. Standard leases give businesses limited flexibility.
- You won’t have to worry about finding a new location in a year or two. Standard leases provide stability. Businesses know what to expect for the next three to five years.
Disadvantages of Standard Commercial Leases
- Standard leases don’t give you as much flexibility for drastic changes to your business. If you need to scale up or down, you won’t be able to act as quickly. You may need to sublease the space to fulfill the lease instead.
- You won’t be able to make significant enhancements to the property.
Who Should Sign a Standard Lease?
Standard leases are great options for businesses with a steady flow of clientele and good standing in the community. Established companies are in a better position to make longer commitments. Standard leases also ensure businesses remain in the same location—one your customers recognize.
Long-term Commercial Lease Agreements
Standard and long-term leases are common in commercial real estate. Long-term lease agreements range from five to 10 years. Landlords will likely pay for some or all of your renovations needed for a business if the owner signs a longer contract, such as a 10-year lease agreement.
Landlords prefer signing longer leases because finding new tenants is difficult and time-consuming. Each tenant may ask to remodel the property, requiring the landlord to invest their resources. If a tenant agrees to a longer lease, the landlord is more likely to update the space. Rent from the tenant will recover the cost of renovations.
Benefits of Long-term Commercial Leases
- Tenants who sign long-term leases receive enhanced concessions and financial provisions from their landlords. For example, signing a longer lease may provide several rent-free months upon move-in.
- Landlords will customize the space and approve more significant changes for tenants who commit to long-term leases.
- It can be comforting knowing a space is yours for years to come. You won’t have to move your business or close for a period of time.
- Long-term leases are predictable. Businesses can plan for the future, knowing the cost of their rent and any expected rent increases.
Disadvantages of Long-term Commercial Leases
- Long-term lease negotiations take more time to complete. There are more details to hash out between the landlord and tenant.
- Signing a long-term commercial lease is a big financial commitment. Business owners should feel confident that they can remain profitable and able to afford the rent.
- Long-term leases lock you in. The fact that you can’t move can be a drawback. Companies expecting to grow rapidly or cut production soon shouldn’t sign a long-term lease. If you do sign and choose to break your lease early, expect to make an early cancelation payment. As you negotiate with the landlord, you may be allowed to sublease the space or buy-out your remaining lease.
Who Should Sign a Long-term Lease?
Long-term leases are best for established businesses with regular clients and a clear vision for the future. Retail and restaurant tenants with ideal locations may opt for longer leases to keep them. Customers get used to dining or shopping at specific locations. For these types of tenants, moving could upset or confuse loyal customers. They may have trouble finding your new space, or they may refuse to travel to your new location.
How Long Should Your Commercial Lease Be?
A commercial lease’s terms and conditions are up to the landlord and tenant. New businesses may look for shorter leases at locations that work for the time being. Well-established companies may search for optimal locations with 10-year leases or request to renew their current arrangements.
Your business’s financial standing, potential risk and projected growth all influence the terms you’d like to set with a landlord. In turn, the landlord’s investment in the property and their vision for an ideal tenant determine what they’d like out of the agreement. The length of your commercial lease depends on you, the space you’d like to lease and the landlord. Remember, the landlord is giving you many rights to their property that cost hundreds of thousands, or perhaps even millions, of dollars.
Do you need help finding commercial real estate?
Contact Commercial One Brokers in Branson, MO. Our experienced office, retail and restaurant real estate brokers will assist in your search for the perfect space.
