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Long-Term vs. Short-Term Leases in a CRE Property

September 11, 2019

Which is best for you?

A lot has been written lately about thinking outside of the lease box, including exploring the possibility of short-term leases. One big reason for this conversation is the rise of pop-up businesses, and the short-term lease is a way of filling space that would otherwise remain empty.

Before jumping into the short-term lease market, however, there are a few things for both landlords and tenants to consider. In many cases, a long-term agreement may be a far better leasing option. As with most things in life, there are pros and cons to both types of leases—and here is the long and short of it.

The power of the short-term lease

Generally speaking, short-term leases can stretch from one to 12 months. Anything longer than 12 months starts to creep into the long-term territory. A short-term lease is a more viable option in markets where there are tough eviction laws and where the demand for space is greater than availability, which means landlords have a larger pool of tenants from which to choose. This, in turn, means a property is more likely to remain occupied each time a short-term tenant leaves.

For the landlord and tenant, a short-term lease has several benefits. The greatest of these is flexibility. Because leases are short (and often have higher rents than similar long-term properties), the landlord is able to change terms and conditions, as well as the rental price, more often to meet his or her changing needs. At the same time, a short-term lease may make sense for a tenant who is—for whatever reason—unable to make a long-term commitment. This, of course, widens the pool of prospects for the landlord.

Short-term isn’t always a good thing

Of course, all of this doesn’t go to say that short-term leases are always an ideal solution. There are some key concerns that both landlords and tenants need to consider:

  • For the tenant, a short-term lease can be a little iffy, especially if they like the space and want to continue renting it, but the landlord finds a long-term tenant (to replace them) in the meantime. And tenants can expect to pay more with a short-term contract.
  • For the landlord, there are issues that need to be addressed each time a tenant leaves, such as advertising for a new tenant, checking references, and preparing the space for the new occupants. Because the old tenants often only have to give short-term notice, landlords—especially those who are not working with a CRE brokerage or property management firm—may find their time to accomplish these tasks flying by. The result may be a property that sits vacant.
  • Landlords will also find that ultra-short-term leases are not valued as high to lenders or potential purchasers of the asset; long-term leases are what provide stability for an asset, which usually translates to a higher value. This depends on the type of investment, however. For example, industrial vs. multi-family: in the latter case, a short-term lease is normal for apartment tenants.

The stability and challenges of long-term leases

By its name alone, the long-term lease indicates that both parties are willing to make a commitment for longer than one year, if not longer. For tenants, long-term-lease properties are less expensive than comparable short-term leases and are also easier to find. Landlords, particularly in markets where rents are falling, will want to offer long-term leases for stability and relatively assured income.

Commitment, though, comes with challenges. Once locked into a long-term agreement, tenants will have to stay or face significant consequences if they attempt to break the lease. Similarly, landlords may feel as if their hands are tied if they’re faced with a problem tenant, or changing market conditions mean they could be charging far more rent.

Finding the perfect lease

One way to help navigate leasing options is to work with skilled professionals who are adept at understanding the unique needs of landlords and tenants. Morris Southeast Group is that team. Additionally, we also provide property management services to help landlords and owners keep more of their time while keeping their properties occupied and tenants happy. To learn more about owner and tenant representation, leasing options, property management services, investment opportunities, and/or other services, call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

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