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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. How long should you go?
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).
On the other hand...just in case...you do not want to be locked in if business goes south and you are committed to the rent.
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). Law and accounting practices typically step up to 5 or 10 year terms.
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. 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.
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).
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.