How Long to Lease?

When I speak with business owners about renting space, I find many of them have the same concerns about lease lengths. Below are some common questions — and my answers to them.

What are typical lease lengths in the New York metropolitan area?

Typical lease lengths are five or 10 years for direct leases and various time frames for space available for sublease, usually one year or longer.

What are the advantages and disadvantages of taking a shorter or a longer lease?

The pros of going short are that you have a smaller lease liability and the flexibility to grow or shrink your company sooner without the inherent problems or costs associated with marketing your unused lease term. The cons of a short-term lease are having to shop again for space in a market where the prices are much higher than the market you entered a few years back. Too, there are always additional costs associated with moving more frequently, including telecom, data wiring, stationery and business cards. While difficult to quantify, there is also the cost of management time spent dealing with these issues, and the cost of disrupting your employees’ work and productivity.

The pros of going long include locking in favorable rental rates, longer free-rent periods and a greater landlord cash contribution for improvements. In addition, one has a longer time over which to amortize telecom and furniture purchases and space improvements. A long-term lease also tends to solidify a company’s image in the community at large.

How should a business owner decide on a lease length?

Before deciding on a lease length a business owner should ask him- or herself the following: How much flexibility do we need to expand or contract? How concerned are we with lease liability as opposed to renewing or moving in a more expensive rental market? Do I expect to merge or get acquired in the next few years? Where do my broker and other advisors see the market heading, and should I really care?

For some businesses, the choice of lease length is a bet on which way the economy and real estate prices are going. For others, a lease length is a reflection of their company’s prospective growth. We usually advise companies with a stable number of employees, who are confident of the continued vitality of their business, to “go long” — opt for a longer lease. More often than not companies that go long can reap a healthier concession and work package from the landlord.

Scarcity of space is always more of an issue in Manhattan, where residential and hotel development competes with office development for space. This scarcity convinces many businesses to go out further into the future in order to secure the location and quality of space they desire.

If a business owner is unsure of a company’s needs and prospects, are there ways to hedge the lease bet?

When clients are unsure of how their business will fare in the next year or so, it might be best to consider space in a professionally managed office suite. (See “Office Space on Demand”)

Another way to hedge one’s bet is to enter into a lease with a length you’re comfortable with while ensuring that the sublease clause is in fact usable. Some brokers and real estate lawyers do not focus on reducing the time it takes for landlords to give written consent to a sublease deal. We have seen companies lose their prospective subtenants while waiting for the 30-day consent period to elapse. In markets like this one, it should be relatively easy to sublease excess space or sublease the remaining term of a lease. There are many tenants that would prefer sublease terms like 22 months or three years and nine months over the standard five- or 10-year terms discussed earlier.

If you take a shorter-term lease, can you negotiate a guaranteed lease renewal?

Even in a weak property market, most landlords in Manhattan will not give tenants the right to renew. In fact, on many office leases encompassing a partial floor or full floors of less than 20,000 rentable square feet, landlords have inserted a relocation clause that says they could have future plans for a tenant’s premises that may not include the tenant. As tenant brokers we find ourselves in a pervasive tug-of war between clients seeking lease term flexibility and landlords who seek to prevent it.

Can you get out of a lease?

It’s extremely rare that a landlord will allow a tenant out of a lease. Basically, a tenant who wants out has two choices — to sublet their space to another tenant, or to go bankrupt. Bankruptcy, although a drastic measure, will release you from your obligation to pay rent for the remainder of the lease term.