Mar 16, 2015

Should You Sign a Short or Long Corporate Lease?

By Don Catalano


Corporate LeaseOnce you've decided that buying isn't the right option for your company, the next decision is whether to lease for the short-term or from the long-term.  Both types of corporate lease structures bring significant benefits and the traditional rule of thumb that landlords want long leases while tenants want short ones doesn't always hold true.

How Your Landlord Thinks

Most landlords are investors or are using investor's money. While finding a tenant that fits their building and that will mesh well with other tenants is usually their primary concern, maximizing their return is the second key factor.

When a building owner looks at his return, he typically creates a financial model. It looks at the cost of the concessions he has to give up front and the rental income he will get over the life of the lease. The model will usually take into account any changes to the income, such as those that come from rental escalations. Typically, an owner will also model out the cost of replacing you when you move out.

Many tenants are primarily worried about the monthly or annual cost of their corporate lease. Landlords, on the other hand, frequently know that the beginning and ending costs are more impactful. If it takes them six months to fill the space when you move out or if they have to put five months' worth of rent into the space in the form of tenant improvements, that lease can offer a much lower return than an offer that pays rent but carries more stability and less up-front cost.

This is why short-term leases are usually more expensive. The landlord is building in the cost of getting you into the space and assuming that he'll have to replace you at the end.

Long Term Corporate Lease Benefits

When you sign a long-term lease, you typically get two benefits. First, since the landlord knows that he can count on income from you for a longer period of time, he will usually be more willing to sweeten the deal financially in the form of greater concessions or lower rent. Second, a long-term corporate lease gives you more stability. You don't have to worry about your landlord throwing you out of your space for another tenant or changing the terms of your occupancy, other than those changes that are already built into your lease.

Short Term Corporate Lease Benefits

When you sign a short-term lease, you get one big benefit: flexibility. While your company is locked in during the initial lease term, you can freely shrink, grow or change your space when the lease expires. This makes opting for a shorter corporate lease term particularly strategic when you are unsure about a space or a market.

The Right Corporate Lease Structure

Ultimately, your company's needs determine the best structure. If you need flexibility, a short lease is best. Otherwise, long leases are typically the most affordable option. A long lease can also be strategic when your local real estate market is going through a period of high vacancy. That way, you can lock in low rents while landlords are motivated to do anything to find tenants.

Other great articles to check out:

5 Advantages to Leasing Your Commercial Real Estate

Three Steps to the Own vs. Rent Decision


Subscribe Now


Office Space Calculator Use Now
10 Steps to Cutting  Your CRE Expenses Download
Improve EBITDA by Cutting Your RE Costs Download


Don Catalano

Don Catalano