Longer Isn’t Always Better – Lease Term And You

I teased this topic in my last blog post, The 10 Questions You Should Ask Yourself Before Starting A Search For Rental Space, and promised to explain why when it comes to Lease Term, “longer isn’t always better”.  Now it’s time to make good on that so let’s dive into a discussion about Lease Term.

Lease Term is defined as the amount of time between when a lease starts and its expiration.  You can think of it as how many months/years you will rent the property for.  In this article we’ll talk about short term leases, long term leases, and the pros and cons of adding years to a leases term.

For the purposes of this discussion we will define a short term lease as one with a term of less than one year, month-to-month leases fall under this category as well.   A long term lease is anything longer than one year.  While the preferred length of lease varies by landlord and building type, most landlords are not interested in signing short term or month-to-month leases as it does not provide stability or predictability to their building’s income stream, it can lead to higher vacancy costs, and greater tenant turnover.  The majority of industrial landlords will do leases in the three-year to ten-year range while retail and office landlords like to see leases at the higher end of that spectrum or longer.

Cons of Longer Leases

While a longer lease can provide stability for your business and the landlord’s books, increasing the term from say 3 years to 10 years may have some negative consequences.  So as promised here are the main reasons why longer isn’t always better:  

• Lease escalations could outpace market conditions.  Commercial leases typically have escalation clauses built in which increases the rent by a set amount each year.  3% is a common escalation amount.
• You may outgrow the space.
• You may need to downsize.
• Your business model may change requiring a different type of space. 
• The location might not be advantageous any longer.
• Your landlord might sell the building and you don’t get along as great with the new owner.

Pros of Longer Leases

Stability is the big one here, but there are other not so obvious reasons why you might want to ask for a longer lease.  

• Know your rent cost for a specific period of time allowing you to budget in this fixed cost without worrying about changing rental market conditions.
• If your business is doing great, and rents in the neighborhood are increasing, your landlord can’t demand more rent.
• Become a fixture in the community.  People know where to find you.
• You might be able to get a better lease rate because you are signing up for more years.
• Generally there are fewer opportunities for short-term leases (anything under a year) limiting your choices of spaces and locations to rent.
• The landlord might be willing to do more work to renovate the space for you for free, or provide you a better tenant improvement allowance.
• You will probably be able to get more free rent (more on this next week).
• You won’t incur the cost of moving again for a longer period of time.

Let me know what you think about this article in the comments below and don’t forget to subscribe to our newsletter.

There are a few other points to address when it comes to lease term such as free rent, renewals, options, and terminations.  You won’t want to miss next week’s post where we discuss those topics and I explain, “why free rent isn’t free”.

*My amazing business partner Lorraine O’Hara contributed to this post*