Long-Term vs Short-Term Commercial Leases

Is your growing company seeking new space but unsure whether to commit to a quick fling or long-haul relationship with a commercial lease? As your trusted real estate advisor, I’ve facilitated both short-term flexible arrangements and multi-decade contracts. Let’s weigh the core trade-offs to make the smartest decision aligning with your growth trajectory.

Key Takeaways

  • Long-term leases offer stability and potential cost savings, while short-term leases provide flexibility and low commitment.
  • Consider the business stage, goals, and industry trends when weighing options.
  • Both lease types have pros and cons to evaluate.

The Long vs Short of Commercial Leases

After over 18 years of facilitating countless commercial real estate deals, I’ve negotiated everything from short-term pop-up leases to long-term decade-spanning agreements. From working extensively with both landlords and business owners, I’ve come to recognize that each company has unique needs when it comes to its commercial lease. There’s no one-size-fits-all solution. However, there are some key factors to consider when deciding between a short-term or long-term lease.

What is a Commercial Lease?

First, let’s level set on some terminology. A commercial lease is a legally binding contract that allows a business to rent commercial space from a landlord, usually for retail, office, or industrial use. The lease specifies terms like:

  • Monthly rental rate
  • Lease length
  • Allowed business activities
  • Tenant vs. landlord responsibilities

Leases range dramatically in length but are typically categorized as:

  • Short-term: Less than 3 years
  • Long-term: Over 3 years

The length has implications for both parties, which we’ll unpack below.

Benefits of Long-Term Leases

Long-term commercial leases—typically defined as rental agreements lasting over 3 years—can offer notable benefits that compel many business owners to commit to an extended timeframe. However, there are also drawbacks to weigh regarding these protracted commitments.

Stability Enables Strategic Planning

Entering a long-term lease provides stability regarding both base rental costs and location. Understanding these core business expenses are fixed for an extended multi-year period allows for prudent long-range operational and financial planning. Steady cash flow enables mapping growth trajectories related to staff, equipment, and general investment.

Cost Savings Through Landlord Concessions

Landlords frequently offer discounted rental rates or incentives like free rent periods and cash allowances to offset moving and tenant improvement expenses as a means of securing a tenant committed to occupying the space for longer than 3 years. These concessions effectively reduce overall occupancy costs compared to shorter-term leases.

Customization and Continuous Improvement

The certainty of remaining in one location for 5+ years allows tenants to customize and enhance the space to best serve their business operations. With less risk of disruptive moves, they can justify expenditures into specialized build-outs, productivity-enhancing equipment purchases, and technology upgrades.

While the stability and reduced costs associated with long-term leases can facilitate attractive planning opportunities, there are also limitations to evaluate, which we can explore further. Please reach out with any questions!

Drawbacks of Long-Term Leases

So you’ve heard all warm and positive stuff about long-term commercial leases locking down location, planning, and savings for 3+ years.

Well hate to be Debbie Downer but I’d be doing you a disservice not spilling some realities about lengthy lease pitfalls:

First up – signing onto a space for so many years severely freezes flexibility if (ok, when) business needs evolve. Expensive early termination fees often put the kibosh on relocating if outgrowing your digs.

You may feel trapped or stuck month-to-month watching market conditions improve as rates plunge around you…but that discounted rate you scored years ago now feels like robbery. Ouch!

If requirements morph or you need ANY lease adjustments, landlords turn stingy negotiating if you’re already on the hook and not a free agent. Existing tenants rarely catch concessions. See how this goes?

Long-Term vs Short-Term Commercial Leases

Potential Downsides of Short-Term Leases

  • Less stability in monthly occupancy costs year-over-year
  • Potential for frequent disruptions and moving costs
  • Landlords rarely offer concessions or incentives

There are merits to both long and short lease terms, depending on your priorities and stage of business. Most organizations shift strategies over time to align with growth.

For instance, a young startup may select flexible short-term space to test ideas and adjust headcount until they find product-market fit and want to settle into more permanent long-term offices.

Potential Advantages of Short-Term Leases

Short-term leases (less than 3 years) attract certain breeds of business by unlocking ultimate agility and flexibility as needs change. Adapting locations rapidly to market shifts, growth, and seasonal swings—that’s the beauty of 1 or 2-year leases before reassessing.

Minimal commitment also appeals if still testing concepts that could flop. Much lower liability offloading space that just doesn’t vibe versus being handcuffed for 5+ years. And if the neighborhood deteriorates quickly, you can skip out.

Last benefit? Move in and out without lengthy negotiations or endless tenant build-outs. Some enjoy changing their offices every year or two without the hassle!

Long-Term vs Short-Term Commercial Leases

Key Decision Factors to Consider

Rather than default to a one-size-fits-all rule of thumb, I coach clients to evaluate some key factors when determining optimal lease length:

  • The current stage of business
  • Short and long-term goals
  • Anticipated space needs in 12 months, 3 years, 5+ years
  • Net income and cash flow stability
  • Cost of capital investments in space
  • Prevailing commercial lease rates and concessions

This allows the creation of a lease strategy tailored to where the company is right now and where it aims to go.

Tips for Negotiating the Best Lease Terms

I’ve found that being well-informed on commercial leasing regulations in your state and tapping expert guidance is critical for negotiating favorable lease terms, regardless of whether you opt for short or long-term.

Here are a few best practices:

  • Work with a tenant broker representative to access landlord incentives and concessions
  • Compare location options to competitive properties and lease rates
  • Clearly define responsibilities between landlord and tenant
  • Understand liability issues like subleasing and early termination
  • Carefully review the fine print on improving the space
  • Establish clarity on renewal and expansion options

Frequently Asked Questions

What are the main differences between a long-term and a short-term commercial lease?

The core differences come down to the length of commitment, associated costs, and flexibility. Long-term leases over 3 years offer more stability but less flexibility. Short-term leases under 3 years provide more agility to change spaces but higher uncertainty.

What is considered a long-term commercial lease?

A long-term commercial lease generally refers to any lease lasting over 3 years, though 5+ years are also common. Terms can range from 5 up to 10+ years for some spaces. The longer duration signals the intention for an extended presence.

How does the length of the lease impact the rights and responsibilities of the tenant and landlord?

The length of the lease can influence the rights and responsibilities of both the tenant and landlord in areas such as property maintenance, rent increases, the option to renew, obligations for repairs, and termination conditions.

Can you get out of a long-term commercial lease early?

It is usually possible but difficult to exit a long-term commercial lease before the end of the term. Legal clauses generally allow for early termination but often with penalties, fees, and paying the remaining rent due. Subleasing the space is sometimes an alternative option. Expert legal guidance is recommended.

Can a tenant sublease the space with both long-term and short-term commercial leases?

Subleasing the space is possible with both long-term and short-term leases, but specific terms regarding subleasing should be outlined in the original lease agreement and followed accordingly.

How does the length of the lease impact negotiations for commercial real estate?

The length of the lease can significantly affect negotiation terms, including rental rates, tenant improvement allowances, lease incentives, and overall lease terms and conditions.

Conclusion

Deciding between short and long-term leases ultimately depends on your unique business situation and objectives. There is no universal best choice.

As your trusted real estate advisor, I’ve facilitated both short-term flexible arrangements and multi-decade contracts for commercial spaces. With the commercial real estate industry projected to exceed $1 trillion in 2021 according to research firm IBISWorld, having expert guidance on leasing decisions is key

If you’re feeling stuck evaluating options, set up a consultation for an in-depth discussion on the pros/cons and scenarios specific to your company. With over 18 years of experience representing tenants, I can offer tailored advice on negotiating lease terms optimized for your needs, whether going the short or long route.

My passion is helping businesses secure the most advantageous spaces. Get in touch to start mapping out your smartest path forward.

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