One of the most common questions we get as brokers is: “Should I lease or purchase commercial real estate space?” There is no one size fits all answer to this question, nor is there really even a right or wrong answer, but a good broker can help you determine what factors are most important for you in finding a space and perform a lease vs. own analysis for you.
If I were sitting down with a client to perform this analysis, there are a few questions I would begin with. The reason for these questions below is this: making the right decision for you and your company does not solely depend on the numbers. These questions help me understand what makes you and your business tick, which ultimately helps me find the right fit for you.
Questions I would ask:
- Do you have the capital to pay a down payment on a purchase?
If the answer is no, then the answer is clear, they need to lease a space. That being said, there are a lot of follow up questions I would still have regarding how quickly they foresee growing and what their long-term goals are to determine what property and what lease terms are right for them!
- Can you afford to tie up liquid capital in commercial real estate?
Even if you have the capital to pay the down payment, it is worth considering whether you want or need to keep that money more liquid. Perhaps you know there are other investments you need to make in your business for which you need those funds. In other words, just because you can pay the down payment, does not mean that is the best use of your money.
- Are you comfortable handling the hassle of maintaining a property?
Whether you hire a property manager or handle it all yourself, if you own a property, you will ultimately be the one in charge of anything that goes awry. I have had some clients for whom that pressure negates the potential financial benefits of purchasing a property and who have, therefore, chosen to lease.
- What is your growth trajectory? Will you outgrow your space?
If you think that your space needs will change drastically in the next several years, then likely a lease will be a better bet for you. Unlike purchasing a property, if you were to lease a space, you can reassess your needs at the end of your lease term and evaluate whether you want to move or stay put. As a general rule, if you can afford to purchase and plan to stay put for at least 7 years, it probably would make financial sense to purchase rather than lease.
- Do you want the flexibility of a lease or the stability of a mortgage?
This is a question that only you can answer! Some people simply like the stability of owning their own property, while others like the freedom that a lease provides.
- What are the local trends in the commercial real estate market?
This last one is a question for me. Unfortunately, your decision is not made in a vacuum, but is affected by what is going on in your market. Your broker should be able to answer questions about availability in the area and whether there are good options for you and your company.
What is a lease vs. own analysis?
A lease vs. own analysis is simply a quick rundown of expenses associated with a lease or a purchase, so that a client can see what their cash flow would look like as a tenant versus as a property owner. Many people mistakenly assume that purchasing a building is always going to be more expensive than leasing a space, but often debt and operating expenses are less expensive than a lease payment.
We begin the analysis of the sale option by listing out all of the upfront costs such as due diligence fees, closings costs, and, of course, the down payment. We then look at recurring expenses associated with owning property such as property taxes, insurance, utilities, maintenance, and of course the mortgage. We will also consider the tax benefits associated with buying property.
We will perform a similar analysis of the lease option looking at the upfront costs of the security deposit, pre-lease inspection, and attorney’s fee and taxes, insurance and maintenance again as recurring fees. There are different tax benefits of leasing a property that we will consider on this side of the analysis.
Another important question we must think about is the profit potential of your decision. If you are leasing a space, there is no profit potential. If, however, you own the property, there are two ways in which this is relevant. The first has to do with whether you choose to lease any portion of the building to another user. Perhaps you do not need the whole footprint of the building immediately, but you would like room to grow; you can lease out the unused portion and receive income from that tenant. Additionally, you must consider the profit potential of selling the property down the road.
Pros and Cons
Ultimately, each decision has pros and cons to weigh. If you partner with a good broker, they can help you think through the pros and cons listed below and help you come to a decision about what the best next step is for you.
|LEASING A PROPERTY|
|More Liquidity||No Investment Potential|
|Greater Flexibility||Higher Monthly Payments|
|Tax Benefits (different from purchasing benefits)||No Property Control|
|PURCHASING A PROPERTY|
|Equity upside||Upfront Capital Requirements|
|Asset appreciation||Increased Liability|
|Rental Potential||Downside Risks|
|Tax Benefits (different from leasing benefits)||Lack of Flexibility|
|Control of Your Property|
Ultimately, we want our clients to find the perfect space for them, whether that means leasing or purchasing. Give us a call today and we can help you figure out which option is best for you!