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12. 3.10 - Leasing vs. Purchasing Commercial Real Estate

Small business owners often face the question of leasing or purchasing their office, retail, or industrial space. In today's market, good deals are aplenty. Just like you can find lower than ever lease deals, properties are available for purchase at a much lower price per square foot. Properties that leased 4 years ago for $20/SF/Year are now asking for $15/SF/Year. Many owners would be happy to get 80-90 cents on the dollar on what they paid for properties 4 years ago.

For most any business owners, the decision to lease or buy comes down to a number of factors, besides the obvious financial aspect. Having a prime location to attract customers may make leasing the only option. Below is a list of a few Pros and Cons for business owners leasing or purchasing their commercial real estate.

Pros of Purchasing Commercial Real Estate

Fixed Costs: Locking in a long term mortgage gives your business clear, fixed costs each month/year.

Lower Costs: Under-utilized programs and loans are available to small business owners to obtain as much as 90% financing on a purchase that makes their monthly mortgage costs lower than their current monthly rent costs.

Transparent CAM charges: Property upkeep is on you now. You know what you can pay for or save on when it comes to lawn care, snow, utilities, and other charges.

Additional Income: Owning additional space or land that your business doesn't utilize opens up the possibility for another source of income by leasing out space, storage, or parking to other tenants.

Cons of Purchasing Commercial Real Estate

Lack of flexibility: Long term mortgage limits flexibility in adapting to growth, downsizing, changes in the industry, strategic planning, and other issues that may appear.

Higher upfront costs: Monthly payments may be significantly reduced by purchasing a property, but the initial down payment is likely much more than the first month's rent.

Maintenance: Lawn care, snow removal, facility upkeep, improvements, etc, are all on you. In leasing, it's just a number you pay each month. Now in addition to running your business, you must also maintain your property.

Less than Prime location: Most small business owners can't afford to purchase a property downtown or along a retail corridor. A lesser location may mean less foot traffic, less drive by traffic, and ultimately, less business.

Pros of Leasing Commercial Real Estate

Prime location: It may mean a little bit higher rent payment, but your business can take advantage of significant foot/drive traffic, attract more walk-ins, and attract more business.

Flexibility: Signing a lease for 3, 5, or even 10 years can provide you with much more flexibility than a long term mortgage. If you need to move to a new location because it's cheaper, newer, smaller, bigger, there's a change in demographics, or whatever the need may be, there's much more flexibility.

Less risk: In the event that you go out of business, coming up short on a lease is probably a better alternative than coming up short on a several hundred thousand dollar mortgage.

Strictly business: With a lease, the time spent on your property is the time it takes you to stroke a rent check. This allows you to focus on what brings the money to you, your business.

More working capital: Without a large mortgage, you're able to utilize capital in ways to further your business.

Cons of Leasing Commercial Real Estate

Equity lost: Just as if you were renting an apartment, the money you pay out leasing space is lost. You can't recoup any payments or even make money by selling the property in the future.

Variable costs: With a mortgage, you have clear fixed costs. With a lease, you're bound to the market. A recovery in the market may mean in a few years when you're negotiating a new lease, you'll be negotiating at $20/sf instead of $15/sf.

Be holden to landlord: Any changes or upgrades that you'd like to see are up to the landlord. If it's not required in the lease, it may mean more money out of your pocket that you won't be getting back.

This is just a short list of Pros and Cons of leasing or purchasing commercial real estate.

What did I miss or leave out? Comment below.

Posted by Bradley J. Untrauer at 05:06 AM on Friday, December 3, 2010