Derbes Falgoust Commercial Real Estate
Should Our Company Lease or Buy a Property?
When your business requires physical expansion, one of the most important decisions you will make is whether to lease or buy a new space. Apart from obvious considerations such as location and the size of the facility, there are many different issues a business must look at before making this crucial decision.
Companies need new space for different reasons. Sometimes your business is so successful that in hiring new employees you simply outgrow your facility. Or your business changes in unexpected ways and you need a different space, perhaps an office with more than one meeting room or even a small auditorium. Maybe your fleet has grown and you need a building with a larger parking area or room for a maintenance warehouse. Perhaps with the growing popularity of telecommuting you have more employees working remotely and actually need a smaller office. There are a myriad of reasons why you might need different space.
Other issues might come up as well. Maybe you have no plans to move, but the building you're leasing comes up for sale. Do you jump at this opportunity to add capital to your business or stay content to lease from whomever eventually purchases your space? Or maybe a neighboring building comes up for sale. Do you purchase that building to ensure that you have the space if you need it in the future, or to have some control over future business neighbors should you choose to lease it out?
There are obvious advantages and disadvantages to both owning and leasing. Owning means you can remodel or maintain your facility to suit your tastes. Perhaps you have an office full of telecommuters or contract workers who are only in the office for short amounts of time. Owning your space makes it more dynamic and adaptable to your needs. But suppose your business is a trendy retail concern. In that case, you would want the freedom of being able to move to follow population trends, and leasing would make that much easier. But whatever the reason you face the decision, there are some serious considerations you must think about, and they are actually far more important than what color you paint the walls.
If you are thinking about purchasing a property, you must look at its market analysis. What is the neighborhood like? Are property values declining or rising? Will buying in the area be a gamble or will it be a good investment for your company? If you buy, you are by necessity entering the real estate business, however tangentially. Will the property appreciate in value and justify your investment?
Buying will require a large cash outlay for the down payment. Although that may sound intimidating, there are decided advantages to this route. Banks love owner-occupants. They will give much more favorable loan terms to businesses that occupy their own properties, which is definitely an advantage to consider. Depending on the loan you are able to get you have a pretty good idea of what your costs will be in the years to come. On the other hand, future costs can be variable if you're leasing; leases can be broken or amended, and short-term leases offer few guarantees about fixed costs. A short term lease may give you more flexibility to move out in a shorter amount of time, but it also means your current rental space will be available to other prospective tenants sooner, leaving you and your business vulnerable.
Another possible advantage to owning your own building is that you can choose to rent out space within it. This might be a really good plan if you know your business will eventually grow; you can capitalize on the space you already own until you need it for your own purposes. However, this creates another "job" for your company: you are now a landlord with all the responsibilities that will entail. Do you want to add this to your job, especially if you are not really interested in the real estate business? Leasing would have to produce enough extra income to offset the extra work, possibly even an extra employee to act as a property manager.
Costs and profits are of course the most important consideration for any issue of any business. That is why a detailed financial analysis is essential to making the decision of whether to buy or lease. This is when you must get your commercial real estate agent and tax advisor on board to help you make the decision. Looking at the net costs, after all tax scenarios are considered, will tell you a lot about whether you should lease or buy a property. There are obvious financial advantages to leasing, such as small outlay and being able to deduct 100% of your rent as a business expense. But there are many more considerations as well, and only your commercial real estate agent and trusted tax advisor will be able to guide you through them.
While there are no obvious answers, leasing will generally provide more flexibility, while owning will generally give you more control over your own building and business environment. Whichever route you take, be sure you have a commercial real estate broker whom you can trust to help you make the best decision for your business.