When I speak with first time retail business owners or single unit business owners, I am often asked, “How long is the lease for?”. Depending on the wishes of the landlord, I usually answer FIVE (5) years or TEN (10) years. Many times, the potential tenant asks whether they can get a THREE (3) year lease and 8 out of 10 times, I say NO. In today’s blog, I am going to explain why…

  1. Confidence: Unless, there is a very calculated business reason for having a less than five (5) year lease term, it does not really inspire confidence in the landlord or leasing agent that you are sure about your business. In fact, in my experience, the people that ask for very reduced terms are the ones that tend to go out of business quickly or really do not have a clear plan. Now there are some cases when a short term lease is strategic to your business. One example would be a business that is developing its own building and needs a place to operate while waiting for the new building to be completed. This is a reasonable example, but telling the landlord or leasing agent, ” I am not sure my business is going to make it, so I think 3 years is safe.” That just doesn’t inspire confidence, but…there are exceptions to the rule.
  2. Value: Landlords often like longer term leases because they add value to the shopping center/building. It is easier to sell the shopping center because the lease value adds to the overall value of the asset.
    The value of your business also increases with longer term leases. I have a client who starts retail operations for his business in various shopping centers and then sells the operation to somebody else. He only does ten (10) year leases because this allows the new owner to carry on the business after my client has set things up for the first few years. If you have very short term lease, without options, you are going to have a VERY difficult time selling or assigning the business because it will be very hard for the buyer to get her money back in such a short amount of time. The buyer just will not be able to realize a fair return on investment (ROI) from buying the business with only 1 year to make it back.
  3. Build Out: If you spent your personal money or the bank’s money to build out/design the interior of your space then you are going to want to stay in business a while to make sure you get your money back. Also, you are much more likely to get some form of an allowance from the Landlord if you chose to stay in the space for a longer period of time. Explaining the tenant improvement allowance is a whole different posting, but the quick and dirty is that Landlords amortize the value of an allowance given to a tenant and if the term is too short, there is no way to get that money back, so the landlord is going to avoid giving the allowance.

These are some general rules and something that is truly important, but these are not hard rules. Sometimes a short term lease is ideal, but in most cases it shows a lack of strength/confidence in business. Other things impact the term, but if you are getting started in business take the time to plan things out and aim for a 5 to 10 year term.

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