One of the most important decisions that business owners will make will involve deciding whether short term lease is the appropriate lease term length for their businesses. This can be a bit challenging if certain factors are not considered. For instance, the specific needs of the company and the expected growth will come into play. While startups and early-stage companies seek short term leases, many established companies may also seek short term leases, especially when preparing for uncertain economic times.
Given the importance of deciding whether short term lease is for your business, we have provided a detailed guide to help ease this decision.
How to Know if a Short-Term Lease is for You
One of the first things that you need to establish during the commercial lease negotiation process is whether your business will be opting for a short-term or a long-term lease. Landlords prefer long-term leases, as they ensure a steady stream of income for an extended period of time and delay the time and financial costs of having to acquire new tenants. Short-term leases tend to favor tenants, but that doesn't mean they're ideal for every company. The following are signs that a short-term lease may be the right choice for your business.
Cost Is Not Your Biggest Concern
For companies that have the cash flow available to cover high rent rates, short-term leases are often ideal. Because they are less-than-favorable for landlords, rental rates are usually higher for short-term leases, so cash-strapped companies may find themselves having to consider longer lease terms, especially in areas where demand for office space is high.
You're Willing to Settle for a Less-Than-Perfect Space
With short-term leases, landlords are less likely to be flexible and accommodating when it comes to concessions. You're likely to find that landlords are unwilling to offer tenant improvements or are determined to provide only a minimal tenant improvement allowance. This means that you may not be able to make all of your dream enhancements to the office.
Your Company Is a Startup
Roughly 80 per cent of all new businesses fail within the first 18 months. Although you don't want to think about becoming a statistic, it's important to be realistic about the odds for success. Startups that become locked into long-term leases could find themselves in default.
You'd Be Able to Absorb the Costs of a Move in the Near Future
Moving your company requires a sizable investment of time and money. Because short-term leases do not provide long-term stability, they are a better choice for businesses that have the means to move more than once within a two-to-five-year period.
You're Expecting Growth Ahead
If you're planning to expand your lines of business or you're on the verge of a boom that will result in more new hires, a short-term lease is a perfect solution. This way, you can meet your current spatial needs and be free to move to a larger office when the time is right.
Out-of-the-Box Working Arrangements Are in Line with Your Corporate Values
Is your company considering more experimental work arrangements for employees? If you're planning to move to three- or four-day workweeks or introducing telecommuting, you're likely to need less office space in the near future. A short-term lease can help you avoid having to pay for empty square footage.
A Relocation Is Part of Your Strategic Plan
If your company is only maintaining a footprint in your current location due to a specific project or until you raise enough capital for new construction or a cross-country move, a short-term lease is the way to go, as you won't have a long commitment to your space.
5 Benefits to a Short Term Commercial Lease
While the prevailing wisdom has always been that long-term tenancy offers lower cost, more and more companies are looking at a short term commercial lease structure. Short term leases offer greater flexibility in changing times along with other benefits.
1. Greater Size Flexibility
When your company signs a long term commercial lease it might be easy to add additional space, but reducing your space is typically challenging since your landlord has you locked in and usually doesn't want to walk away from that income. With a shorter term obligation, though, you can easily move or renegotiate when that lease agreement ends. This lets you rapidly expand and contract your company's spaces based on the needs of your business.
2. Greater Locational Flexibility
It wasn't that long ago that financial services firms had to be in Manhattan and downtown San Francisco and tech firms had to be in Silicon Valley and either Cambridge or the western suburbs of Boston. Today, Charlotte is a core financial center, New Jersey is an acceptable alternative, and many tech firms skip the traditional meccas to locate in Seattle, Austin, and other emerging cities. Desirable markets shift and short term commercial leases give you the flexibility to follow trends, customers and workforces.
Committing on a short term basis also lets you move around within a market, as well. This allows you to respond to changes in traffic patterns, new hiring, and all of the other changes that can impact your community and your worker's commutes.
3. Lower Capital Cost
While a short term commercial lease might not seem to have anything to do with your company's capital expenditure budget, it can actually save you a great deal of money. If you own a building, you might be tempted to invest in it to make it perfect for your applications. With a long-term lease, you might also be willing to go over your tenant improvement allowance to craft perfect space. When you choose short-term space, you are much more likely to look for an office that works for your business as-is, saving you from additional capital expenditure.
4. Lower Occupancy Cost
While short term commercial space might seem more expensive at first blush -- hotel rooms usually cost more per night than apartments, after all -- the flexibility that short term leases bring may end up saving you money. The ability to match space to needs in real-time (or almost real-time) prevents you from paying for unused space. Some short term space is designed for efficiency, saving you from bearing all of the cost of amenity space. Finally, if you are able to occupy short term sublease space you might also be able to get a discount relative to market from the master tenant who is desperate to recoup at least some of their costs.
5. Potential Lease Accounting Benefits
Finally, with all of the changes in how leases are treated from an accounting perspective, truly short term commercial leases bring one more benefit. If your company is going to be in a space for one year or less and is unlikely to renew its occupancy, that lease may be able to be kept off of your balance sheet. While this is unlikely to impact your net profit (or your tax liability), it can affect your company's leverage levels, which could be important to lenders, investors and analysts.
If cost is not your concern and you are expecting growth ahead, going for a short term lease may be the ideal lease term for your company. In addition, you have to include relocation as part of your strategic plan. Not only will you have the added benefits of lower occupancy cost, short term lease also offers greater locational flexibility.