by Prince Licaylicay | Oct 22, 2021 | All Articles, Leasing
Renewing your commercial lease agreement seems like a pretty simple task. But as a wise tenant and business owner, you must know that there is more to the task than merely signing your lease agreement for another set of years. There are actually things you can do and must not do in order to ensure that your requests and needs are met by the landlord.
Here are three (3) of the most crucial do’s and don’ts when it comes to renewing your commercial lease agreement.
-
Market Research
Whether you find yourself contented with your current location or not, market research is a significant step in exploring your rights and demands as a tenant. Doing market research entails studying the current status of commercial real estate properties in your area, including rental rates, agreement terms, incentives, and perks.
Compare your current status vs. the market
Communicate with other tenants in your location or in neighboring properties and asking how much they pay for rent, what their lease agreement inclusions are, and the incentives and perks they enjoy, if there are. Of course, you need to remain professional in your approach for them to disclose these pieces of information.
Consider sales on current location
Market research may also include finding options if you are deciding to transfer. Never dwell on false optimism, which means that if you feel that the location is not working for your business given the time of your stay, it is often better to transfer to a more advantageous location than stay and wait for progress to happen. Moving out and transferring may initially cost you money but once you secure a better location, it will prove to be a correct move in the long run.
Work with experts
For some business owners, it may benefit to recognize that doing market research is not your cup of tea. There’s an apparent reason why commercial real estate brokers exist. Therefore, you can acquire market research by working with a commercial real estate broker who knows the market very well to find leasing details, better locations, amenities or help guide you in the right direction on making a quality decision to attain positive results in the long run.
Provide time to plan
Remember that market research will benefit you as a tenant and as a business owner. Therefore, you need to invest ample time to plan out your actions. It is recommended to have things in mind at least six to nine (6 – 9) months before your lease expires. This should give you enough time to explore and prepare your necessary paper works for whatever you decide to do.
Another side note: always keep critical dates in mind, such as your lease expiration date.
So, what’s in it for you and your business?
By doing market research you can:
- compare your current rent, agreement inclusions, incentives, and amenities with that of other tenants
- evaluate if you are on a fair trade with your current landlord or you are on a disadvantaged position with higher rental rate than the other tenants
- use these bits of information to negotiate better terms or request incentives, perks, or additional amenities
- find a better location for your business
-
Negotiate
Negotiate from first offer
During your lease renewal, never settle with the first offer. Your landlord may retain the same rental rate or discuss with you any changes in your rent or expenses. The first offer is often a rate the landlord has set for all tenants at the project. Therefore, you need to start negotiating for a better trade from your standpoint.
Some tenants are scared of negotiating terms with their landlords, while some simply settle with their current rate. As they say, “Don’t fix something that’s not broken.”
But as a business owner, your goal is to maximize your resources and generate higher income, and if that means saving a certain amount from your rental expenses, then that is already significant. This is where your gathered information from market research enters the picture.
Have operating costs audited
When negotiating, make sure to have your operating costs audited to assess whether all your operating expenses are properly managed and is spent on the appropriate items.
What’s in it for you?
- can negotiate for reduced rental fee, especially when other locations offer lesser rate or other tenants in your location are offered less
- can request for perks or incentives offered to new or other tenants in the same location
- can negotiate better terms on lease agreement, particularly on operating costs, based on your business or space’s needs in the present
- discuss flexible arrangements with your landlord, considering the potential changes or expansion your business or space may undergo in the future. These arrangements may include terms on space expansion and additional amenities or share-spacing options should your business require financial or spatial compression in the future
-
Don’t disclose profit increase with your landlord
Landlords are businessmen like you, and they are also looking for ways to be profitable. With this being said, never share details of your sales to your landlord, especially your increased sales. Some landlords may take this to their advantage to increase your rental fee knowing that you can afford this increase and how inconvenient and impractical it is to transfer to a new location when sales are booming in your current one.
Understandably, some tenants can and do develop a great relationship with their landlords, but there is something to be said keeping such details about your business close to the vest.
We hope this guide enlightened you on what you must and must not do when renewing your lease renewal agreement. Indeed, there are a lot of things to consider before signing a lease renewal agreement. It’s a given that as a business owner, you want nothing but the best for your business in all its aspects. With this being said, it is part of your responsibility as a business owner to study the ins and outs of managing your enterprise, particularly on the space where your business stands.
Considering buying your own building versus leasing? If you would like information on the next steps to get started, consider reaching out to us. We’re here to help you achieve your commercial real estate goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Phill Tomlinson | Oct 20, 2021 | Blog
WHAT IS 1031, AND WHY ARE 1031 EXCHANGES SO SIGNIFICANT?
n nnGenerally stated, a 1031 exchange, otherwise called a like-kind exchange, is a swap of one investment property for another. Although most swaps are taxable as sales, if yours meet the requirements provided in 1031, such transfer will not be taxable or will have limited tax at the time of the exchange. nn nnSimply put, you can change the structure of your investment without recognizing any capital gain. This allows the investment to grow, deferring or delaying the payment of tax. Furthermore, there is no limit on how many times or how frequently you can do 1031 exchange. Hence, you can roll over the income from one real estate investment to another, and another, ad infinitum. The implication is that you avoid paying the taxes through rolling over the investment unless and until the investment is alienated, exchanged, disposed of, sold, or transferred. All of these while paying only the tax at the terminus or end of that one transaction. nn nnKind transactions allow real estate professionals to grow and diversify their portfolios, with limited federal income tax implications. In application, to qualify under Section 1031, there must be an exchange of real property for productive use in a business. Also, the same applies for investment solely for property of a like-kind to be held either for productive use in trade. nnSection 1031 is a mode of asset appreciation on the exchange wherein the payment of tax is not eliminated but merely deferred until a later point when the taxpayer eventually sells the property received in the exchange. nn nn n
POSSIBLE CHANGES IN SECTION 1031 IN 2022 DUE TO BIDEN ADMINISTRATION
n nnThe Biden administration has proposed limiting Section 1031 (Like-Kind Exchanges) deferral to a maximum of $500,000 for a single taxpayer and $1,000,000 for married taxpayers. The reason for this limitation is to defray the costs of the $1.8 trillion American Family Plan. President Biden’s proposal would allow for 1031 exchanges by excluding particular personal property and intangible property in the deferral calculation. The president’s proposal would still allow for 1031 exchanges of real property but minimize the benefit to only a deferral of $500,000 or $1,000,000 for married taxpayers filing a joint income tax return per year. Therefore, any excess of $500,000 or $1,000,000 would be subject to capital gains tax. In addition to limiting the amount of gain that is deferred under 1031, the Green Book likewise proposes that long-term capital gains be taxed at the ordinary income tax rates for taxpayers with adjusted gross income exceeding $1 million. Under the Green Book, the highest common income tax rate would increase from 37% to 39.6% for married, joint-filing taxpayers with taxable income over $628,300 and single taxpayers with taxable income over $523,600. The limitation on the amount of gain that can be deferred on 1031 like-kind exchanges coupled with increased tax rates on long-term capital gains has the potential to cause the tax bill of high-income real estate professionals to skyrocket.nn nn n
SIGNIFICANT IMPACTS IN THE REFORMATION OF SECTION 1031
n nnWith these new tax proposals, high-net-worth real estate professionals should be monitoring potential federal tax reform carefully. Moreover, real estate investors considering their next investment in recent real estate dealings should be delved into the use of Tenancy in Common arrangements. This could be favorable in assisting and in limiting the amount of profit realized on an eventual 1031 deferral to ensure it falls within the ambit of limitation. While 1031, like exchange limitations, has not yet been passed, it is clear that tax proposals would shift behaviors within the real estate market. This results in federal income tax planning becoming more demanding. nn nnOne thing is clear: The elimination of 1031 exchanges, which have been part of the Tax Code since 1921, could significantly negatively impact future real estate values and the economic prosperity of small investors who own investment property. Given the pandemic-related market uncertainty, investors have been relying on the stability of their real estate holdings as a hedge against a sometimes unpredictable economy. Thus, adverse changes or elimination of 1031 exchanges could cause significant tax consequences for existing investors and erode value for wealth transfers to future generations.nn nn n
WILL THE 1031 EXCHANGE BE ELIMINATED?
n nnBefore answering this question, the following must be taken into consideration as to whether the repeal of Section 1031 will accomplish what Congress intends to accomplish: nn nnRepeal will not accomplish the goals of Congress. If the intent of Congress in repealing the law is to acquire more income for the state, reforming section 1031 is not the answer. It will instead have a significant negative impact on the future of the real estate. A repeal:n
n
- Will not increase fairness;
n
- The imposition of tax over $500,000 or $1 million as the case may be taxes cash flows not wealth;
n
- The repeal will not raise significant revenues for the government, and most importantly;
n
- The repeal will cause a decline in real estate values, a drop in manufacturing, and will result to economic stagnation.
n
n nnRetention of Section 31 will help achieve the goals set by Congress. The tax deferral benefit provided by section 1031 is a beneficial device for meeting all of these goals. It offers a dominant engine for the economy of the US. Like-kind exchanges boost transactional activity that results in jobs and taxable income that sustain other businesses, including small and medium-sized enterprises. Since foreign real estate and assets predominantly used outside the United States are not subject to exchange for domestic real estate and assets, the section 1031 deferral benefit directly stimulates reinvestment in US communities and businesses. This, in turn, promotes job growth within the country’s borders.nn nnRepeal of Section 1031 will have significant risks. The repeal of section 1031 will have the following adverse effects, viz: n
n
- It will cause a decline in real estate values;
n
- Elimination of section 1031 would result in a considerable increase in depreciation deductions and reduced income tax revenue;
n
- Fewer transactions result in fewer jobs in the 1031 Exchange industry and the real estate, construction, title insurance, mortgage, and other related industries.
n
n nnRepeal of Section 1031 would, in effect, tax cash flows, not wealth. Section 1031 allows an ongoing investment by the taxpayer without reducing the cash flow available for the advancement of his business. Thus, the value of assets exchanged, whether farmland, commercial or rental residential real estate, remains invested in the taxpayer’s business.nnWithout the current treatment under section 1031, cash-strapped business-use and investment assets owners could be forced to downsize their businesses if they do not have enough cash flow to acquire replacement assets and pay tax on the gain or depreciation recapture of the old asset.nn nnIn conclusion, with all the adverse effects of the repeal of Section 1031 of the Tax Code, it is doubtful that the same will be totally eliminated. To eradicate the same would result in the downturn of, among others, real estate and other business transactions. And we all know how our society runs on commercial transactions, so it’s better to be equipped with the correct information on 1031. nn nn
nnEven after outlining all the information above, the use of a 1031 Exchange in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your 1031 investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.nn nnNeed help on your 1031 Exchange? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!n
nn nnPhill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns. nn nnBookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCREnn nn
by Prince Licaylicay | Oct 20, 2021 | 1031 Exchange, All Articles, Investing
WHAT IS 1031, AND WHY ARE 1031 EXCHANGES SO SIGNIFICANT?
Generally stated, a 1031 exchange, otherwise called a like-kind exchange, is a swap of one investment property for another. Although most swaps are taxable as sales, if yours meet the requirements provided in 1031, such transfer will not be taxable or will have limited tax at the time of the exchange.
Simply put, you can change the structure of your investment without recognizing any capital gain. This allows the investment to grow, deferring or delaying the payment of tax. Furthermore, there is no limit on how many times or how frequently you can do 1031 exchange. Hence, you can roll over the income from one real estate investment to another, and another, ad infinitum. The implication is that you avoid paying the taxes through rolling over the investment unless and until the investment is alienated, exchanged, disposed of, sold, or transferred. All of these while paying only the tax at the terminus or end of that one transaction.
Kind transactions allow real estate professionals to grow and diversify their portfolios, with limited federal income tax implications. In application, to qualify under Section 1031, there must be an exchange of real property for productive use in a business. Also, the same applies for investment solely for property of a like-kind to be held either for productive use in trade.
Section 1031 is a mode of asset appreciation on the exchange wherein the payment of tax is not eliminated but merely deferred until a later point when the taxpayer eventually sells the property received in the exchange.
POSSIBLE CHANGES IN SECTION 1031 IN 2022 DUE TO BIDEN ADMINISTRATION
The Biden administration has proposed limiting Section 1031 (Like-Kind Exchanges) deferral to a maximum of $500,000 for a single taxpayer and $1,000,000 for married taxpayers. The reason for this limitation is to defray the costs of the $1.8 trillion American Family Plan. President Biden’s proposal would allow for 1031 exchanges by excluding particular personal property and intangible property in the deferral calculation. The president’s proposal would still allow for 1031 exchanges of real property but minimize the benefit to only a deferral of $500,000 or $1,000,000 for married taxpayers filing a joint income tax return per year. Therefore, any excess of $500,000 or $1,000,000 would be subject to capital gains tax. In addition to limiting the amount of gain that is deferred under 1031, the Green Book likewise proposes that long-term capital gains be taxed at the ordinary income tax rates for taxpayers with adjusted gross income exceeding $1 million. Under the Green Book, the highest common income tax rate would increase from 37% to 39.6% for married, joint-filing taxpayers with taxable income over $628,300 and single taxpayers with taxable income over $523,600. The limitation on the amount of gain that can be deferred on 1031 like-kind exchanges coupled with increased tax rates on long-term capital gains has the potential to cause the tax bill of high-income real estate professionals to skyrocket.
SIGNIFICANT IMPACTS IN THE REFORMATION OF SECTION 1031
With these new tax proposals, high-net-worth real estate professionals should be monitoring potential federal tax reform carefully. Moreover, real estate investors considering their next investment in recent real estate dealings should be delved into the use of Tenancy in Common arrangements. This could be favorable in assisting and in limiting the amount of profit realized on an eventual 1031 deferral to ensure it falls within the ambit of limitation. While 1031, like exchange limitations, has not yet been passed, it is clear that tax proposals would shift behaviors within the real estate market. This results in federal income tax planning becoming more demanding.
One thing is clear: The elimination of 1031 exchanges, which have been part of the Tax Code since 1921, could significantly negatively impact future real estate values and the economic prosperity of small investors who own investment property. Given the pandemic-related market uncertainty, investors have been relying on the stability of their real estate holdings as a hedge against a sometimes unpredictable economy. Thus, adverse changes or elimination of 1031 exchanges could cause significant tax consequences for existing investors and erode value for wealth transfers to future generations.
WILL THE 1031 EXCHANGE BE ELIMINATED?
Before answering this question, the following must be taken into consideration as to whether the repeal of Section 1031 will accomplish what Congress intends to accomplish:
Repeal will not accomplish the goals of Congress. If the intent of Congress in repealing the law is to acquire more income for the state, reforming section 1031 is not the answer. It will instead have a significant negative impact on the future of the real estate. A repeal:
- Will not increase fairness;
- The imposition of tax over $500,000 or $1 million as the case may be taxes cash flows not wealth;
- The repeal will not raise significant revenues for the government, and most importantly;
- The repeal will cause a decline in real estate values, a drop in manufacturing, and will result to economic stagnation.
Retention of Section 31 will help achieve the goals set by Congress. The tax deferral benefit provided by section 1031 is a beneficial device for meeting all of these goals. It offers a dominant engine for the economy of the US. Like-kind exchanges boost transactional activity that results in jobs and taxable income that sustain other businesses, including small and medium-sized enterprises. Since foreign real estate and assets predominantly used outside the United States are not subject to exchange for domestic real estate and assets, the section 1031 deferral benefit directly stimulates reinvestment in US communities and businesses. This, in turn, promotes job growth within the country’s borders.
Repeal of Section 1031 will have significant risks. The repeal of section 1031 will have the following adverse effects, viz:
- It will cause a decline in real estate values;
- Elimination of section 1031 would result in a considerable increase in depreciation deductions and reduced income tax revenue;
- Fewer transactions result in fewer jobs in the 1031 Exchange industry and the real estate, construction, title insurance, mortgage, and other related industries.
Repeal of Section 1031 would, in effect, tax cash flows, not wealth. Section 1031 allows an ongoing investment by the taxpayer without reducing the cash flow available for the advancement of his business. Thus, the value of assets exchanged, whether farmland, commercial or rental residential real estate, remains invested in the taxpayer’s business.
Without the current treatment under section 1031, cash-strapped business-use and investment assets owners could be forced to downsize their businesses if they do not have enough cash flow to acquire replacement assets and pay tax on the gain or depreciation recapture of the old asset.
In conclusion, with all the adverse effects of the repeal of Section 1031 of the Tax Code, it is doubtful that the same will be totally eliminated. To eradicate the same would result in the downturn of, among others, real estate and other business transactions. And we all know how our society runs on commercial transactions, so it’s better to be equipped with the correct information on 1031.
Even after outlining all the information above, the use of a 1031 Exchange in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your 1031 investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on your 1031 Exchange? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Phill Tomlinson | Oct 15, 2021 | Blog
The length of time someone considers a short-term or a long-term lease may vary on individual perspectives. But on average, a short-term lease typically is any term under three (3) years, while long term leases range from five to ten (5 -10) years and onwards. Some professionals within the real estate industry often tag the time within these two periods as medium term.nnLet’s focus on the differences between short-term and long-term leases discussing both their advantages and disadvantages. Finding the right lease span for you and your business vary on your needs and potential growth. This article will guide you to choose which among the two suits your needs and the anticipated direction your business may take.nn n
Advantages of Short-Term Leases
nLess commitment, Less RisknnShort-term lease is perfect for startup business which is still unable to commit to longer lease agreements. Opting for a short-term lease agreement reduces financial risk for these startup businesses. With this, business owners can also venture on experimental endeavors with relatively lower risk.nn nnFlexibility & ContingencynnGrowth is what a business pursues to attain, and often, this involves expansion in space, workforce, or service coverage based on how finances are turning out.nnShould your business need space expansion to cater to your growing demands in the future, it is relatively easier for you to transfer to a much bigger or more efficient location with a short-term lease.nnFor businesses that may not be fortunate enough in their run and decide to stop operations and shut down, short-term leases can also provide easier and much faster freedom from rent expenses.nn n
Disadvantages of Short-Term Leases
nLack of securitynnSimply put, landlords prefer long-term leases than short-term ones as the former generates security in cash flow for a longer period of time. With this being said, leasing on a short-term basis puts you on a vulnerable position for possible eviction once your lease expires and your landlord decides to lease your current location to an entirely new long-term tenant or a long-term tenant expanding their business.nnTherefore, if you are getting more serious and invested on your business, a short-term lease is not for you since it entails uncertainty on your business, additional stress to you as a business owner, and the potential inconvenience of finding and moving your business to a new location.nn nnMoving costs and business instabilitynnTake note: transferring to a new location can be costly. Furthermore, transferring to a new location affects your business stability, as it can lose a portion of your established clients or customers and will also require you the additional time, effort, and resources to re-establish your business at your new location.nn nnHigher costsnnYes. Short-term leases are higher in cost compared to long-term leases. This goes back to the notion that landlords get more security in terms of cash flow with long-term leases. Therefore, landlords, as business owners that they also are, often charge higher rates for short-term leases. Rates may also be affected by the current market, which means that your rental rates can increase every renewal based on current market standards.nn nnFinancial unpredictabilitynnWith short-term lease rental rates dependent on market standards, there is much unpredictability on the amount you need to shell out. Not having a definite amount for rent can limit your strategies and interfere with your financial plan.nn nnLimited Negotiating PowernnIf we have not yet established landlords’ preference for long-term leases over short-term ones, then here is another reason that puts short-term lease on a disadvantage from its long-term counterpart.nnShort-term tenants are rarely granted their requests or demands, including expansion, renovation, cost sharing, etc. This is not to say that short-term tenants cannot negotiate. However, as compared to the highly favoured long-term tenants, short-term ones are perceived by landlords as less valuable due to lesser time of tenure.nn nn n
Advantages of Long-Term Lease
nWe’ve quite established how landlords prefer long-term lease over short-term ones, and the many perks that come with this preference. But let us dig deeper into the pros and cons of long-term lease to help you decide whether this is the best-suited one for you.nnLower costs & easier to findnnOne of the major advantages of long-term lease is lower rental rates. Since long-term lease generates security of steady cash flow for a long period of time to landlords, many landlords are leasing their commercial real estate properties for relatively lower costs. Furthermore, long-term lease agreements also spare you, the tenant, from rate fluctuations, ensuring a definite amount paid all throughout the time of lease.nnAdditionally, since this is preferred by landlords, they often welcome long-term tenants with open arms, willingly evicting short-term tenants for those who can commit for a long run.nn nnAnticipate Rental CostsnnWith long-term lease, you will be able to anticipate your rental costs and can efficiently plan out your finances and business strategies for a long run, regardless of market rate standards.nn nnBetter Negotiating PowernnLandlords put so much value on long-term tenants that they are privileged with certain negotiation power. Demands, requests, and forwarded terms, such as renewal options, expansion options, renovations, cost sharing, subleasing, etc., are often granted, along with additional perks, like free covered parking.nnRemember: from a landlord’s point of view, a long-term tenant is for keeps. As much as possible, they want to maintain a good relationship with long-term tenants than go through the entire process of looking for a new one.nn nnBusiness stabilitynnOnce you sign for a long-term lease, you get to run your business with peace of mind, not having to worry about eviction and moving to another location, even after your lease expires. With long-term lease, you can effectively establish your business on your location and work to steadily grow your operations. Furthermore, long-term leases can provide security. If the property is sold by the landlord, you are still ensured that you can retain your spot until the lease expires.nn n
Disadvantages of Long-Term Lease
nBound for yearsnnThis is a matter of perspective. While being secured of space for a long time can be seen as an advantage, it can also have negative implications. You cannot easily move to another location when unforeseen changes force you to do so. Terminating lease agreements or paying for the remaining time within the agreement may cost you a huge sum of money.nnYou need to understand that a long-term lease is a financial risk that you need to carefully examine before deciding to take, taking into consideration both possibilities of success and failure.nn nnComplex negotiationsnnWhile long-term tenants have more privilege in the negotiation table as compared to short-term ones, the process is more complex and tedious, therefore, taking both parties longer time to settle on agreed terms.nn nnLimited terms for expansion, unless otherwise providednnFinally, you need to carefully examine the terms within the agreement to ensure that you, the tenant, and the physical space, are both viable for expansion if ever your business needs it in the future. Otherwise, you may need to find a bigger or better space in the future to cater to the needs of your growth.nnAll in all, both options have their own benefits and disadvantages. Deciding which option is best for your business is a matter of thoroughly studying your financial capacity, business needs, and potential up/downscaling in order to reduce, if not totally eliminate, your risks.nn
nnEven after outlining all the information above, leasing commercial real estate (CRE) can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your leasing goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.nn nnNeed help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!nnn nnPhill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns. nn nnBookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCREnn
by Prince Licaylicay | Oct 15, 2021 | All Articles, Leasing
The length of time someone considers a short-term or a long-term lease may vary on individual perspectives. But on average, a short-term lease typically is any term under three (3) years, while long term leases range from five to ten (5 -10) years and onwards. Some professionals within the real estate industry often tag the time within these two periods as medium term.
Let’s focus on the differences between short-term and long-term leases discussing both their advantages and disadvantages. Finding the right lease span for you and your business vary on your needs and potential growth. This article will guide you to choose which among the two suits your needs and the anticipated direction your business may take.
Advantages of Short-Term Leases
Less commitment, Less Risk
Short-term lease is perfect for startup business which is still unable to commit to longer lease agreements. Opting for a short-term lease agreement reduces financial risk for these startup businesses. With this, business owners can also venture on experimental endeavors with relatively lower risk.
Flexibility & Contingency
Growth is what a business pursues to attain, and often, this involves expansion in space, workforce, or service coverage based on how finances are turning out.
Should your business need space expansion to cater to your growing demands in the future, it is relatively easier for you to transfer to a much bigger or more efficient location with a short-term lease.
For businesses that may not be fortunate enough in their run and decide to stop operations and shut down, short-term leases can also provide easier and much faster freedom from rent expenses.
Disadvantages of Short-Term Leases
Lack of security
Simply put, landlords prefer long-term leases than short-term ones as the former generates security in cash flow for a longer period of time. With this being said, leasing on a short-term basis puts you on a vulnerable position for possible eviction once your lease expires and your landlord decides to lease your current location to an entirely new long-term tenant or a long-term tenant expanding their business.
Therefore, if you are getting more serious and invested on your business, a short-term lease is not for you since it entails uncertainty on your business, additional stress to you as a business owner, and the potential inconvenience of finding and moving your business to a new location.
Moving costs and business instability
Take note: transferring to a new location can be costly. Furthermore, transferring to a new location affects your business stability, as it can lose a portion of your established clients or customers and will also require you the additional time, effort, and resources to re-establish your business at your new location.
Higher costs
Yes. Short-term leases are higher in cost compared to long-term leases. This goes back to the notion that landlords get more security in terms of cash flow with long-term leases. Therefore, landlords, as business owners that they also are, often charge higher rates for short-term leases. Rates may also be affected by the current market, which means that your rental rates can increase every renewal based on current market standards.
Financial unpredictability
With short-term lease rental rates dependent on market standards, there is much unpredictability on the amount you need to shell out. Not having a definite amount for rent can limit your strategies and interfere with your financial plan.
Limited Negotiating Power
If we have not yet established landlords’ preference for long-term leases over short-term ones, then here is another reason that puts short-term lease on a disadvantage from its long-term counterpart.
Short-term tenants are rarely granted their requests or demands, including expansion, renovation, cost sharing, etc. This is not to say that short-term tenants cannot negotiate. However, as compared to the highly favoured long-term tenants, short-term ones are perceived by landlords as less valuable due to lesser time of tenure.
Advantages of Long-Term Lease
We’ve quite established how landlords prefer long-term lease over short-term ones, and the many perks that come with this preference. But let us dig deeper into the pros and cons of long-term lease to help you decide whether this is the best-suited one for you.
Lower costs & easier to find
One of the major advantages of long-term lease is lower rental rates. Since long-term lease generates security of steady cash flow for a long period of time to landlords, many landlords are leasing their commercial real estate properties for relatively lower costs. Furthermore, long-term lease agreements also spare you, the tenant, from rate fluctuations, ensuring a definite amount paid all throughout the time of lease.
Additionally, since this is preferred by landlords, they often welcome long-term tenants with open arms, willingly evicting short-term tenants for those who can commit for a long run.
Anticipate Rental Costs
With long-term lease, you will be able to anticipate your rental costs and can efficiently plan out your finances and business strategies for a long run, regardless of market rate standards.
Better Negotiating Power
Landlords put so much value on long-term tenants that they are privileged with certain negotiation power. Demands, requests, and forwarded terms, such as renewal options, expansion options, renovations, cost sharing, subleasing, etc., are often granted, along with additional perks, like free covered parking.
Remember: from a landlord’s point of view, a long-term tenant is for keeps. As much as possible, they want to maintain a good relationship with long-term tenants than go through the entire process of looking for a new one.
Business stability
Once you sign for a long-term lease, you get to run your business with peace of mind, not having to worry about eviction and moving to another location, even after your lease expires. With long-term lease, you can effectively establish your business on your location and work to steadily grow your operations. Furthermore, long-term leases can provide security. If the property is sold by the landlord, you are still ensured that you can retain your spot until the lease expires.
Disadvantages of Long-Term Lease
Bound for years
This is a matter of perspective. While being secured of space for a long time can be seen as an advantage, it can also have negative implications. You cannot easily move to another location when unforeseen changes force you to do so. Terminating lease agreements or paying for the remaining time within the agreement may cost you a huge sum of money.
You need to understand that a long-term lease is a financial risk that you need to carefully examine before deciding to take, taking into consideration both possibilities of success and failure.
Complex negotiations
While long-term tenants have more privilege in the negotiation table as compared to short-term ones, the process is more complex and tedious, therefore, taking both parties longer time to settle on agreed terms.
Limited terms for expansion, unless otherwise provided
Finally, you need to carefully examine the terms within the agreement to ensure that you, the tenant, and the physical space, are both viable for expansion if ever your business needs it in the future. Otherwise, you may need to find a bigger or better space in the future to cater to the needs of your growth.
All in all, both options have their own benefits and disadvantages. Deciding which option is best for your business is a matter of thoroughly studying your financial capacity, business needs, and potential up/downscaling in order to reduce, if not totally eliminate, your risks.
Even after outlining all the information above, leasing commercial real estate (CRE) can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your leasing goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
Recent Comments