How Long Should My Lease Be?
How long should a commercial lease be?
If you’re searching for a new office location, it’s an important question to get right. A good lease can prime your business for long-term success. The wrong lease can cause recurring inefficiencies that drag your business down.
Leases matter. And the timeframe of a lease is one of the determining factors that shapes the entire agreement. That puts a lot of pressure on all parties to come up with a length that makes sense.
If you’re feeling intimidated, don’t worry – we’re here to help. With decades of experience in commercial real estate and lease negotiations, we take pride in identifying winning solutions for all parties. The right timeframe exists, and we can help you find it.
So, how long should your lease be? Let’s take a look.
The Average Length of a Commercial Lease
Here’s a good baseline to start with: the average length of a commercial lease is five to seven years, with the majority of leases falling into the five-year side of that range.
Why is five years the average? Well, it tends to be a good middle ground for property owners and prospective tenants. It’s long enough to guarantee a level of stability for the property owners, but it’s generally not so long that it feels restrictive to the prospective tenant.
Anything that’s significantly longer or shorter is often the result of special circumstances or a creative agreement. That said, there are several factors that can influence the length of a lease above or below the industry average.
The stage of the business.
Is the business in growth or decline? Or, is it stable?
If you’re a growing business, you may opt for a shorter lease to allow for flexibility; you don’t want things to be uncomfortably cramped in the space when you get to the third year because you’ve grown and are squeezing all the new employees that was perfect before you hit your growth.
Similarly, if you’re working to phase out of your business, you’ll also want a shorter lease term. We’ve witnessed, for instance, a doctor near the end of his career opt for a three-year lease term with the option to renegotiate at the end of the agreement. He wasn’t sure whether or not he’d be ready to retire at that time, but he wanted to leave his options open.
If your business is notably stable, on the other hand, you may want to consider a longer lease term. You may be able to get decreased rent via a longer term if you have a very high confidence in the fit of the space. Take note, though: this can be risky if you hit an unexpected growth or contraction phase and your space no longer fits your needs.
The type of business.
There are a few types of business that may be well-suited for longer lease terms. These tend to be companies in highly-specialized industries, or situations where an extremely customized fit-out / layout / design is a necessity. These layouts are specialized and many times expensive to replicate so locking in a longer term is typically preferred.
Dentists, for example, generally require unique amenities that increase the cost of the fit out so that a longer term makes sense. Laboratory or medical environments often fall under this umbrella, too.
The longest lease we’ve seen was in the biomedical space for 15 years. It was negotiated on the basis of a highly-specialized fit out that involved intricate lab equipment installation. Because of the longer term, the high upfront cost was amortized to become more cost effective on a monthly basis.
The age of the space.
Finally, the age of the space can be a contributing factor in determining the length of the lease.
First generation spaces (new construction), for example, tend to generate longer leases. It costs more to get a new space up, and owners are looking to recoup that cost, which is more easily done via a longer lease. After that, though, things normalize; second and third generation spaces fall back toward the average lease length of five years.
A Few Tips on Negotiating the Length of a Lease
With those factors considered, hopefully you’ve gotten a better idea of how long your lease should be. Here are a few things to keep in mind:
You’ll be able to get a more advanced fit out if you take a longer lease. If a landlord is going to put $30K into a space, they’ll want to know that you’ll be staying there for the amount of time it’ll take to make the commitment worthwhile.
You can work out renewal terms to reduce risk. If you think you’ll be in a place for 15 years but are hesitant to completely commit, you can set a lease up to have renewal terms with pre-negotiated rent. This give your business a chance to opt-out but eliminates the hassle of renegotiation (and potentially saves you rising rent costs in the process).
Breaking a lease isn’t advised, but it is possible. If the fit isn’t sustainable, you may end up paying the unamortized amount in order to leave or some other negotiation tactic.
It’s usually best to go with something close to the standard. There’s a reason most leases are five to seven years: that length almost always makes the most sense. Going with anything shorter can be unreasonably costly. Going with anything longer can be unreasonably risky.
Unless your circumstances really are special, don’t be afraid of the average.
Ready to Find the Best Lease for Your Business?
If you’re ready to find the lease that works for your business, let’s talk.
At AushCo, we have years of experience in brokering commercial real estate in Frederick to make great deals happen, and we take pride in benefitting our clients’ businesses. Whatever your ideal lease term is, we’ll help you to find it.