Most tenants (and many landlords) don’t differentiate between “leasing” and “renting,” assuming the existence of a legal agreement signed by both parties. Subsequently, these terms are often used interchangeably. However, in property management, there are some subtle yet important distinctions. Before marketing a property for tenants—residential or commercial—owners and landlords should consider the following.
Long-term vs. short-term occupancy
The primary difference between renting and leasing pertains to the tenant’s length of occupancy. While most residential leases are for one year, rental agreements may be monthly or even weekly. Commercial leases (especially for large properties) are typically multi-year agreements. Both rental and lease agreements legally bind the tenant and the landlord to the terms spelled out in the agreement, including a security deposit and which party is responsible for maintenance and utilities.
Auto-renewals
It’s common for rental agreements to auto-renew upon expiration of the initial term of occupancy. The renewal period is typically the same length as the original, and all terms of the agreement remain binding. The agreement should spell out what the tenant must do to stop an auto-renewal. Conversely, most lease agreements do not automatically renew. Tenants must sign a new lease with the landlord and accept any changes in terms if they wish to remain in the building.
Leases provide predictable income and stability
In a buyer’s market (or, in this case, a tenant’s) where there is more supply than demand, it’s advantageous to lock in extended occupancy periods. Although the landlord can’t raise the monthly fees during this period, the tenant is legally obligated to pay for the full lease term, guaranteeing pre-determined income. Longer-term tenants are also attractive because the owner avoids costs associated with tenant turnover (cleaning, re-painting, advertising, etc.).
Renting provides month-to-month flexibility
Alternatively, in a market with high demand for space and fast-rising rents, landlords may wish to maintain shorter occupancy periods or shift to a month-to-month auto-renewal following the initial term, which allows them to increase the monthly rent to market rates or institute other changes to the rental agreement.
While this may seem the most attractive financial choice, most tenants will have a limited appetite for frequent rent increases and may look for a more stable, long-term option elsewhere. The increased income may not offset the cost associated with regular turnover. Even in a hot rental market, expect to lose at least one month’s rent in the transition of tenants.
Renting accommodates properties in transition
Another scenario where short-term rentals may make sense for an owner is if the property (or neighborhood) is transitioning. For example, a residential neighborhood re-zoned for commercial properties may draw significant interest from developers interested in purchasing the property for redevelopment. Owners may negotiate a higher sales price if they can deliver a vacant property within 60 to 90 days. Short-term rentals may also be attractive to some tenants, e.g., individuals shopping for a new home who don’t want to sign a long-term agreement or seeking temporary housing as part of a job assignment. The downside of short-term rentals for both parties is that a unit may become unavailable/unoccupied on short notice, resulting in an inconvenience for the tenant and a loss of income for the owner.
Complexities of commercial property
The considerations outlined thus far apply to both commercial and residential properties. Commercial leases, however, are generally more complex and may vary significantly based on what is included in a lease.
The monthly payment for an “all-inclusive” lease—also referred to as a gross or full-service lease—covers all associated costs, including maintenance of the property (exterior and interior), along with a percentage of property taxes and insurance. Leases that are not all-inclusive are called “net leases.” A tenant’s monthly fee may cover some common expenses, but the tenant may also be responsible for utilities, taxes, insurance, janitorial or other expenses. There are varying structures for net leases (double and triple) and other complex structures to accommodate tenant and owner interests.
Commercial properties with multiple tenants are more likely to have all-inclusive leases versus net leases, as it may not be practical to separate some costs, e.g., multiple-meter utilities, or the landlord prefers the consistency and control of a single service provider, such as for cleaning or pest control.
Legal considerations
Long-term leases are the best fit for owners seeking a stable, predictable income and willing to forgo the potential of additional profitability within a short, single lease term during rising values. Short-term rental agreements are a better option for owners who value or require the flexibility associated with short-term rentals. Regardless of what you call them, however, rental and lease agreements are binding under the law.
Every state has landlord and tenant laws that govern the rights and obligations of both parties. These laws guide landlords on their rights and responsibilities. Check with your local municipality and state for information on rental and leasing agreement regulations, and then clearly spell out all terms in the agreement to avoid a dispute with a tenant after signing.
At GNP Realty, our property management team understands the importance of structuring tenant agreements that align with the owner’s goals. Contact us if you’d like to know more about how we can assist you with residential or commercial property rental, leasing and management.
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