One of the most common questions that come up when leasing office space is whether it's better to sign a long-term or short-term lease. This is especially important for small businesses whose success, or failure, could be at least partially dictated by this decision. While there's no right answer -- every company's needs are different -- there are certain advantages to each that, when carefully analyzed with the help of a commercial broker, can help steer businesses toward the best option.
Benefits of a long-term lease include:
- Stability - If you find your dream location, a long-term lease (typically five years or more) ensures you'll be able to stay there for an extended period of time, even if your building is sold. Short-term tenants (one to five years) risk being forced out of their space unexpectedly, inconveniencing customers and employees and jeopardizing the future of their business.
- Predictability - Tenants that sign a long-term lease know how much their rent will increase from year to year, regardless of market conditions. By comparison, companies that sign a short-term agreement could see their real estate costs soar each year, hampering growth.
- Tenant Improvements/Concessions - Landlords are often more willing to give tenant improvement allowances and other concessions like free rent to tenants that sign long-term leases. These aren't off the table for short-term tenants, but they may be more difficult to negotiate.
Short-term leases are attractive for the following reasons:
- Flexibility - Tenants that need to scale up or down, or move to a new location altogether, are easily able to do so with a short-term lease. Conversely, long-term tenants would either need to sublease or transfer their lease to another tenant in order to relocate.
- An "Easy Out" - It's estimated that eight out of 10 businesses fail within 18 months of opening. Unlike long-term leases, which leave tenants on the hook for unpaid rent if they ever go out of business, short-term leases allow entrepreneurs to cut their losses and move on if a business venture fails to take off.
One alternative to a traditional short-term lease is shared office space, which allows businesses of all sizes to rent space on an annual or month-to-month basis. In addition to offering amenities like conference rooms and cafeterias, as well as a full support staff to assist with back-office functions, these centers make it easy for tenants to add space as their businesses grow or reduce their footprint during down periods.
Another option is to sign a short-term lease with several renewal options. For example, a tenant who inks a three-year lease could have an option to renew for an additional year or two -- often at a higher rate -- after the initial term expires. Doing so allows tenants to have the best of both worlds by remaining in their existing location if business is going well or relocating to another location (without penalty) if they run into problems with their landlord or simply want a change of scene.
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Frank Chalupa is president and co-founder of Amata Office Centers, Chicago's largest privately owned office suites provider. Founded in 2002, Amata offers an array of full- and part-time office solutions to businesses of all sizes. For more information, visit www.amataoffices.com.