This can be one of the most difficult decisions you will need to make. There are a number of factors that come into play here (yes answers are more indicative of a longer lease term, while no answers indicate that short term lease flexibility is more important):
- Is my business stable such that I don’t expect my future space needs to change?
- Does the space that I am leasing require a substantial investment in tenant improvements?
- Do I expect rents to increase significantly in the future?
- Is the location of my new space very important to the success of my business?
- Is relocating my business hard to do?
- Is my rent lower if I sign for a longer term?
The first two items are the most important points to consider. If you have a start-up business, then a shorter lease term is most likely better. However, if your start-up business requires significant improvements, then you may be forced into a longer term lease by the simple economics of amortizing the improvements over a long term so that your base rent is affordable. One potential pitfall to avoid is bad advice from your broker or the property’s listing agent. Remember, the longer the lease term, the more money is paid out in commission. While that may be good for the broker, it might not be what is best for you. Ask the question, “What is the difference in rate between a three year and a five year lease?” Once you have that answer, then decide.
Posted in: Commercial Real Estate Terms
