Guest blog by Holly Welles. Holly is a real estate blogger interested in the ever-shifting landscape of the market. You can read more of her work on her own blog, The Estate Update, and follow her on Twitter @HollyAWelles.
As a business owner, getting into your first commercial space is a major milestone. For most, purchasing a storefront isn't an option. Therefore, you will be leasing the area from a landlord or property manager.
When you're filling out your application, you'll find two options — long and short-term leases. What is the difference between the two, and what are the pros and cons of signing a long-term agreement?
Short vs. Long-Term Lease
What's the difference between short and long-term commercial leases?
Short-term leases can last a few weeks or as long as five years. Week- and month-long rentals are popular for pop-up stores that only need to open for a little bit at a time. For example, a holiday store that sells tree ornaments.
Long-term leases, on the other hand, are ten years or longer. They're a better option for businesses that have a more extensive plan. For example, a sporting goods store that plans to take over the local market.
Let's take a look at the pros and cons of long-term leases.
Pros of Long-Term Leases
What are the positive aspects of long-term leases for commercial properties?
First, if you're willing to accept a long-term lease, you often have more power to negotiate with your potential landlord. You might be able to negotiate a lower rent, fewer annual increases and other benefits.
A long-term contract also means you'll never be surprised by rent increases or other costs. You work out all of the details in advance. Any changes have to be renegotiated and agreed upon by both parties. For a small business, this can give you security and predictability. Your rates and annual increases are locked in when you sign.
You may also have the option to add things like rent abatement to your lease contract. Rent abatement is an agreement stating the landlord will reduce costs or eliminate them if the property is uninhabitable because of fire, natural disaster or forced evacuation. This agreement is something you will need to negotiate at the start of your lease to ensure your business is protected.
Cons of Long-Term Leases
Long-term leases might sound like the best option. However, they do come with a few downsides.
You get the benefit of locking in your rent costs. However, can't break the lease before the term is over without penalty. Unless you meet certain criteria or your landlord is willing to let you break your lease, you're stuck in that storefront. You will be unable to move your business, even if your clientele leaves the area.
One way around this issue is an early cancellation clause. For example, you can include a section where you may cancel your lease if you haven't reached income projections by a specific date, such as six months or one year out.
Negotiations for long-term leases tend to take longer than those for short-term agreements. You're working out all of the details for a deal that will last a decade or more. It can take a while to come up with a contract that both parties agree on.
What's Best for Your Business?
Of the two options, which type of lease is better for your business?
If you're planning to expand or grow substantially during the next five or ten years, especially if those changes will require you to upgrade or expand your storefront, a short-term lease might be the best choice. They're more expensive in the short run, but you've got more flexibility — you can move, expand or relocate as needed.
Short-term leases are also better if you're starting out. This is especially important to consider for smaller operations, as data shows that 20% of small businesses fail in their first year. A short rental allows you to walk away without paying massive penalties if things go belly-up.
On the other side of the coin, if you're an established business that isn't planning on expanding or changing dramatically, consider negotiating a long-term contract. This type of lease provides better stability with locked-in rent costs and annual increases. While it's harder to expand your business with a long-term lease, it's still possible.
Which option is best for your business? Take a look at all the variables — your business plan, client base, income and expenses — and determine how you're planning to grow and change in the next five to ten years.
Signing a Long Term Lease? Here's What to Know
Choosing a lease for your business isn't something that should be done quickly or taken lightly. Take a closer look at the pros and cons of both types of leases to determine which will work best for your business.
You may find starting with a short-term lease and transitioning to long-term is the best way to build your business. You'll have more opportunity to figure out the small details. For other companies, a long-term lease is a go-to option.
The right choice will depend on you and your company's needs.
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