We get the call daily from busy business owners that want to consider their next Real Estate move regarding their company. The first thing we always discuss when they have decided to move is are they buying or leasing the next space and the pros and cons of doing so. Most pros and cons are finance and business strategy related but many times its just the wants and desires personally of the ownership. Typically we always come back to the conveniences, flexibility and dollars as we come to the conclusion. So I have made a list of a number of things that every business manager or owner should consider as they try to figure out whether to buy or lease their next business location.
- Flexibility – When you buy a building you are stuck with it until you either sell it or lease it out, if you need to move. If you close up shop, you can be stuck with one more liability to manage. If you lease a building you have the ability to move as you grow and sometimes even expand right where you are without much hassle. I really like the idea of leasing early on and buying once you are established when it comes to flexibility.
- Cash Outlay – When you buy you will typically have to come to the closing with cash, whether it is for a down payment, closing costs or building improvements. You will spend substantially more when you are buying a property on day one. When you lease property cash out is minimal, especially if the space is turnkey and move in ready. You may have some security deposit, initial rent and furnishings, but nowhere near the up front expenses of buying a property.
- Deductions – Tax deductions are a huge part of small business success and depending on your accounting strategy there are several deductions that may or may not be more attractive as a buyer or seller. Buyers can deduct interest, depreciation and non-mortgage related expenses from their income which lowers the over all tax liability from profits. On the other hand a lease may allows lease payments, utilities, taxes and most related expenses to be deducted as well. Both strategies have their upside and both are worth having your CPA comb over and weigh before making this decision.
- Management – The managing of commercial real estate can be overwhelming to some and perfectly fine with others. You must consider this before jumping into a lease or purchase of your next property. When you lease a property, depending on your lease terms, you may be just a phone call away from every problem that may arise. Full service leases can allow landlords to assume all responsibility of maintenance, damage and anything that could go wrong over the term of a lease. As an owner you will should these responsibilities or have to hire a good management company. Leaking roof? Would you rather handle this or call the landlord? Major snow storm overnight? Did you arrange for driveway clearing or does the landlord have that handled. These are both doable but are 100% dependent on your willingness to take on.
- Appreciation – This is a big one especially over a long period of time and can be a major driver in your decisions. A property typically appreciates over time if well maintained and in a prominent location so who should benefit from this. If you are looking at a 3-year term this probably will not mean anything unless there is distress in the property involved. If you are looking at planting roots and staying put for 10 or more years, I would highly recommend doing some thinking on this. Appreciation is a really asset and as an owner you get to take that with you and use as equity to refinance, leverage for other projects or enjoy at a sale. When you lease a property, that is not true and any appreciation goes right past you and into the owner’s possession. Now there are times that a property does not gain value and sometimes even loses market value and becomes worth less over time. We are going to always assume the best in our scenario so you must take into consideration the chance that having the flexibility and low cost terms of a lease may result in the high appreciation and equity to an owner.
Growing a business is hard enough and spending a bunch of time figuring out your next location can be a nightmare and consume valuable time. My recommendation is to build a team to traverse the process including your CPA, experienced commercial broker and maybe even your attorney if you rely on them. Buying and leasing are completely different strategies and both are important to consider, so take your time and plan in advance so that you make the best decision for your company and its future growth.
Curt has been in the Indianapolis Real Estate business for over 10 years and spent his first years learning all aspects of commercial management and brokerage. He has had great success in managing existing commercial projects and new retail and office developments. Curt specializes in building owner representation and purchases in the Westfield Indiana market as well throughout the Indianapolis Metro area. Curt is passionate about growing the local Westfield community and in his free time volunteers with Westfield Youth Assistance and raising 2 children with his wife Jennifer.
