Long Term & Short Term

One of the first decisions you will need to make when considering any property is whether it will be designated as a short term or long term investment. Are your intentions to purchase a property, repair or improve it, and then make a quick sale? Or do you intend to keep the property, rent it, and go for the long term investment potential?

Obviously, the return on investment in a short term is quicker, and the rate will be higher due to the short time of the exposure. There are, however some risks associated with a short term investment. What if the property requires more work (and money invested) than expected? What if you are not able to sell it quickly? In situations such as these, your potential profit could be severely limited.

Long Term Investment

The long term appreciation rate looks favorable.
You do not shy away from the idea of dealing with renters.
You do not have the funds available to do a full scale "fix and turn." .
You need a continuing tax break.

For strong credit tenants, a longer-term lease enhances the tenant's ability to negotiate favorable terms. Credit tenants in long-term leases offer additional value to the landlord by increasing access to favorable financing, thereby providing higher net cash flow. This quantifiable value-add is powerful leverage for tenants during lease negotiations.

If a company can identify core properties and can plan ahead, ownership or sale-leaseback offers the opportunity to reduce occupancy costs even more than a long-term lease with a traditional landlord.

The same approach can be applied to portfolios spread across multiple locations, provided the companies can identify which locations are core to the business and which should be treated with more flexibility. In some cases, multi-location portfolios may have less essential locations that are so small in relative size to the portfolio that the amount of increased cost for short-term leases has minimal impact. However, the determination to take on short-term leases should only be made based on a long-term plan.

One of the biggest misconceptions that too often leads to costly reactionary real estate decisions is the belief that "long term" equates to "inflexible." Whether a company has two leases or 200 leases, a long-term strategy that consists of properly structured long-term leases can be beneficial. And, on the whole, having a long-term real estate strategy that aligns with the company business plan can dramatically reduce occupancy costs - over both the short and long term.

Short Term Investment

The property is in an area where property values are stable but not significantly increasing.
You have the means or the connections for getting repairs done at a reasonable price.
You are organized enough (and have enough time) to rehabilitate the property quickly.
Your tax situation can withstand a possible capital gains "hit."

A short-term lease is generally defined as a term of less than five years, while long-term leases are 10 years and above. By virtue of their length, short-term leases require the landlord to amortize transaction expenses over a short time. So the expenses - tenant improvements, legal fees, commissions - are usually passed along to the tenant via a higher rental rate.