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You searched long and hard. You finally found the perfect space for your business. Now all you have to do is sign your life away on the lease, so you are now about to write the letter of intent.
How long should you go with your commercial lease?
On the one hand, it's your new home - you want to ensure you are protected and living happily ever after (for at least until you outgrow the space).
Here is a super duper piece of intel developed by our in-house research team:
Therefore the landlord would love to do as long of a term as possible, in most cases.
Are you a growth business or in a high growth market?
Software companies are notorious for only wanting 3 year terms (or less), to accommodate for the fact that they may simply outgrow the space prior to the expiry. Law and accounting practices typically step up to 5 or 10 year terms as they are stable and likely want to amortize the cost of the tenant improvements.
Is there any chance that the perfect location one day won't be perfect?
Do you need to be close to your customers or suppliers and is there any chance that they will migrate elsewhere?
What about your employee base - are they going through lifestyle changes, such as getting married and moving the suburbs?
How do you serve your customers and how has technology changed that?
How virtual have you become and what does the future look like?
How much are you and the landlord contributing to bring the space up to your standards?
Landlord and tenant work into the space has to be amortized just like a mortgage. The longer term you spread those dollars over, the lower the overall rental payment will be.
Be sure to ask what interest rate the landlord is charging on the tenant improvement allowance and then figure out what the payments will be when you amortize that over various lease terms (for example, 5 years vs 10 years).
A five year lease may seem like an eternity when you sign the lease but it can fly by faster than you think. If considerable dollars were invested into your space the landlord could know that you do not want to repeat the process just five years later. Most leases even if they have a renewal right, it is not equipped with an arbitration right (your right to appoint a 3rd party to keep negotiations fair).
This could mean that they ask for a higher than expected renewal rental rate.
Businesses eventually get sold.
Will your lease be viewed as an asset (for example a prominent retail location), or a liability (for example a company acquired for a patent or customer list and the acquiring company has no need for the office space).
Since the landlord will benefit from a longer lease term (and therefore cash flow), they may should be willing to "buy" that cash flow by providing more incentives, such as free rent. In that case despite a higher rental rate, you can still win on achieving a lower net effective rental rate.
More insight from our amazing research team - buy low and sell high.
When it is a tenant's market and landlords are tripping over each other to chase few tenants looking for space, then you should maximize that position by going long in a soft market (and trying to go short in a hot market).
That way, if you time it perfectly, you are always renewing when the market is becoming soft. Much easier said than done though.
Does the landlord own more properties nearby or will you be landlocked when trying to expand?
If the landlord owns more properties you can enjoy the benefits of going long term while having some flexibility to expand into one of their other properties.