Should You Commit To A Long Term Lease?

Whether you’re a landlord or tenant, you have asked yourself what is the ideal term for your upcoming lease agreement. Some building owners who have larger, more established rental properties are usually comfortable with a particular lease term for the majority of their tenants. For example, if a landlord owns an established office building with dozens of spaces, he/she may prefer a 5, 7, or 10 year lease for most, if not all of their spaces. However, a landlord who owns a smaller building with transient tenants, or a history of less-than-ideal tenants, may be apprehensive to lease long-term. A tenant may fear being stuck in a space that they outgrow in the near future or one they can no longer afford if business goes bad.

While it can be scary for both landlord or tenant to commit to a longer lease, there are many benefits to longer leases.

Benefits to the Landlord

  • You Won’t Lose Rental Income Due To Vacancy from Turnover– On average, it takes six months for a landlord to find a new tenant. If we put dollars to this, suppose you have a 3000 square foot space at $25/SF, six months of rental income is $33,000. In this example, every time you have to replace a tenant, you risk losing, on average, $33,000. You are better off getting your tenants to stay longer and keep the rental income consistent.
  • Reduce the Hassle and Cost of Negotiating a New Lease- New tenants mean new negotiation terms and requests. Every new tenant presents a new proposal with different requirements for everything from parking spaces to build out costs. In contrast, renewing a lease with a current tenant is much simpler, as most likely the only piece to re-negotiate is rental rate. And if there were extensions in the original lease, even that may have already been decided.
  • May Increase the Value of the Building- If you decide at some point that you want to sell the building, potential buyers will compare your building to other recent sales in the area. However, equally as important, if not more important, will be the financial stability of the building. Long-term tenants create more value for the buyer because they demonstrate reliable, consistent income.
  • Makes It Easier To Fill Other Vacancies– If the building is not fully occupied, but has consistent, long-term tenants, potential tenants are more likely to view the space as a good place to lease.

Benefits to the Tenant

  • Saves Time and Hassle of Looking For Another Space– Tenants searching for a new location for their business spend several months, if not longer, looking for the ideal space. It is quite a process touring perhaps dozens of buildings, then going through the process of applying, negotiating, and finally leasing the space. Why do this again in 1 or 2 years?
  • Helps you Maintain Your Customer Base- Your customers, whether retail customers or professional clients, know where to find you when they want your products and/or services. It’s not smart to move around and have customers coming to purchase from you, and then find you are no longer there. They may assume you are out of business, or that your business isn’t stable if you’re moving around too much (unless you are simply a growing business and have outgrown smaller space, of course). Staying in the same location is easiest for your clientele, and therefore better for business.
  • Ensures that your Buildout Costs Were an Investment, Rather than an Expense– It is always better to invest than spend. Moving into new space can cost tens of thousands, if not hundreds of thousands of dollars depending on the level of buildout. Once you have made that kind of investment, you want to get the most out of it as possible. Putting $50,000 into a buildout, then moving out 3 years later, doesn’t make much financial sense. You’re better off staying longer and using that space for as long as you can.
  • Can Help You Get Financing For Your Business- Having a longer lease, and keeping up with your monthly lease payments, will increase your credit and credibility which can open financing opportunities for your next stage of business growth. If a bank or lender sees that you’ve been able to make your lease payments for 10 years consistently, in the same location, it can improve your chances of getting commercial loans or lines of credit.
  • Can lock you into rental rates that are more favorable for you than future market rates- A longer lease at a flat rental rate, or even one with designated increases, may be more favorable than signing a shorter lease and then having to negotiate new rates in the future.
  • Allows you to run your business, rather than worrying about where to run it– Running your business is where your focus should be, not on having to find space to run it.

Of course, a longer lease isn’t for everyone. If you own a brand new business, if you have a rapidly growing business and expect to outgrow your space quickly, or if you are unsure about the location being the right one for future growth, these are all valid reasons to stick with a shorter lease. If you’re a landlord who is unsure about what you’d like to do with the building in the future, or if you have plans to attract a larger tenant that will use that space in addition to other space in your building, such as leasing an entire floor, these are also good reasons to lease short-term.

If you would like to know more about the right length of time to lease for your business or building, the best thing to do is speak with a commercial real estate agent or broker and let them help you figure out what is the best scenario for you and your business.

Questions on leases, lease terms, and what to expect? Contact Kim.

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