Lease or buy commercial space? Advantages and disadvantages

The overall goal of most businesses is to grow and prosper. As your business gets bigger, at some point you may need to expand your space, and choose the best way for your company to accomplish that growth.

There are two main approaches: leasing space or purchasing a building. Either method may be a good way to go about getting commercial space. The right choice ultimately depends on your current business and finances combined with where you want to take your company in the future. To make your best decision, it’s helpful to consider the advantages and disadvantages each approach offers and relate them to your business situation. Here are some of the advantages and disadvantages to consider.

Leasing Commercial Space

1. No down payment.   While a lease may require a deposit, the cash outlay is significantly less than a typical down payment requirement for financing a purchase. That can have a positive impact on your cash flow, and the amount of money in your company.

2. Tax deduction. Each of your lease payments is a business expense that will reduce your taxable income, and lower your tax payments.

3. No repairs, maintenance costs. Depending on your lease terms, you may not have to spend money repairing and maintaining it. Those can require significant time and expenses.

4. Easier to qualify. Many times obtaining a lease does not require a credit report. This makes qualifying for a lease easier.

5. Quicker, with more choices. In most markets, there are more leasable commercial sites than buildings for sale. Plus, the leasing process takes less time than purchasing, so you can move your business more quickly.

1. Lease increases. Many leases are set up to allow annual rent increases, while others often increase costs when your lease expires and needs to be renewed.

2. Lease renewal ends – change of business location. The owner of the building may decide – for various reasons – not to let your business renew your lease when it expires. This will force your company to move to a new location.  This can be costly to your business and impacts your customers.

3. No equity in building. By not owning the building you lease, you have no equity in it. As the value of the building increases, there’s no capital growth benefit to your company.

4. Little control. With many leases, you have little control over needed property improvements, maintenance, repairs and other factors.  In such cases, you have to rely on the building owner to make the decisions.

5. Less space for growth. The space you lease is a specific square footage, and usually cannot be expanded because of other companies leasing space in the building. Therefore, it’s important to lease enough space and/or get an option to lease additional space that allows for future growth.

Buying Commercial Space

1. More potential fixed costs/no rent. By purchasing a building, you don’t pay increasing rent, and you may be able to get a fixed-rate on up to 80 percent of the mortgage loan (USDA, SBA guaranteed loans) so that most of your monthly payment doesn’t go up. Also, you can sometimes refinance at a lower rate and reduce the cost. Finally, when the mortgage is paid off, you eliminate its monthly payment.

2. Tax deductions. As an owner, you can usually deduct depreciation and the mortgage interest payments, which reduce your tax liability. In addition, you can write off repairs, maintenance, taxes and many other costs. For improvements, you also gain depreciation tax advantages.

3. More space, more income. Purchasing a building tends to give you more space for future growth, and can provide your business with a permanent location. This helps your company build its location value to its customers.  Plus, there may be additional space available you can lease to other companies, which generates income and may even cover your full mortgage costs.

4. Investment/capital gain. Chances are, over time the value of your building will grow. This adds to your company’s capital valuation. And, should you choose to sell the building you could realize that gain as income.

5. Total control. As the building owner, you can make the decisions on how to improve, alter, expand and enhance the building. This control can have a positive impact on enhancing the building to improve the reputation and customer viewpoint of your business.

1. Initial costs. Buying a building costs substantially more initially than leasing space. You have to pay for property appraisal, and make a large down payment for the mortgage. As a result, it’s important for your company to have sufficient excess cash on hand and not use cash required for operations for this investment.

2. More responsibility. When you own a building, you’re responsible for all aspects, including financial management, repairs and maintenance. This can take a great deal of extra time from you and reduce your focus on your business.

3. Cost increases. You can expect your building’s property taxes and insurance costs to rise each year.  This adds to your company’s expenses, and can have an impact on your cash flow.

4. Location downgrades. Over the years, commercial property areas have in certain instances declined in traffic and thus, negatively impacted sales. It’s important to choose your building in an area you feel confident will continue to do well in the future.

5. Finding the right building. One of the biggest challenges is finding a building that fits your company and future plans, and is located where you want to be. It can take a long time to find the right building, and that can create a lengthy delay in moving and growing your company.

As you can see, there are significant advantages and disadvantages to both leasing and buying commercial property for your business. However, by understanding and evaluating them based on your specific business, you’ll be able to make a better choice.

We welcome the opportunity be a “sounding board” for you as you consider your alternatives.