Long-Term vs. Month-to-Month Leases: A Business Perspective for Commercial Landlords

When it comes to commercial leasing, most landlords opt for long-term leases. This preference is not solely based on personal convenience but on business principles that ensure long-term sustainability and profitability. To understand why, we need to consider the financial impact and practical implications of both types of tenancies on commercial landlords.

The Financial Advantage of Long-Term Leases

Landlords prefer long-term leases due to the inherent stability and economic benefits they offer. Suppose a property is vacant for a month. This month represents a lost source of income – around 1/12th of a full year's revenue. While it's possible to recover this loss through increased rent, the certainty provided by long-term leases is often the more attractive option. Landlords benefit from predictability and can avoid the costs and risks associated with constant turnover of tenants.

For example, a landlord might need to invest several months' rent into refurbishing a property for a new tenant. If this investment fails and the new tenant vacates unexpectedly, significant financial losses can occur, especially if the landlord has to cover property tax payments or other obligations. Long-term leases reduce these risks by providing a stable income stream and minimizing the likelihood of extended vacancies.

Efficiency and Cost Savings

Leasing for a long-term period also allows landlords to offset the costs of setting up and maintaining a property. Consider the scenario of a 12-month lease versus a month-to-month lease. In a 12-month lease, the landlord needs to invest a considerable amount of time and effort to prepare the property for occupancy and subsequently to maintain it. However, the same effort is required for a month-to-month tenant, as the landlord still needs to ensure the space is in a tenant-ready condition.

Examining the costs involved, a long-term tenant pays rent for the entire lease period. For a landlord, this means a higher income per unit time. In the case of a 12-month lease at $3100 per month, the landlord earns $37,200 over 13 months (including the preparation period). In contrast, a month-to-month tenant who leaves at the end of a month would require the landlord to charge $5720 per month to cover the same 13-month period and earn $2860 per month. This illustrates the economic advantage of long-term leases.

Uncertainty and Market Tension

Month-to-month tenancies introduce an element of uncertainty. Tenants who choose to terminate their lease early often do so due to financial strain, relocation, or other unforeseen circumstances. For landlords, this instability can increase the risk of vacancies and lower overall income. To mitigate this, landlords often increase rent for month-to-month tenants to reflect the higher risk and lower predictability. This adjustment also compensates for the time and effort required to manage and screen new tenants.

Moreover, long-term leases offer the opportunity for landlords to lock in tenants at a set rent, reducing the need to compete with the market continuously. If market rates increase, a long-term tenant is often stuck with the original rent, ensuring the landlord maintains a stable income stream. Month-to-month tenants, on the other hand, may face increased rent as the market fluctuates, depending on their willingness to sign new leases.

Conclusion

In essence, landlords prefer long-term leases because they provide a more predictable and efficient economic model. The stability of long-term tenants allows landlords to manage costs and increase income effectively, while the inherent flexibility of month-to-month tenancies comes with added risks and costs. Understanding these factors helps commercial landlords make informed decisions that align with their business goals and financial objectives.