Lease versus Buy for your Small Business

By Gregg Schoenberg Monday, March 5, 2012

As a result of the recent economic crisis and real estate crash, prices for corporate real estate in many markets now look more attractive than they have in several years. Add in historically low interest rates, and it is easy to see why many small-business owners may have an eye on the corporate real estate market. If you are in the market for commercial space for your small business, you should start by considering the lease-versus-buy question.

The lease-or-buy decision is ultimately an economic one, driven by return on investment (ROI).  Because the purchase of corporate real estate involves tying up a large chunk of money for a long time, you’ll want to realistically assess what kind of return you can expect to gain from that investment and compare that to the return you could get from investing in your core business.  Make sure not to fall into the trap of assuming too high of an appreciation rate for your real estate investment, a lot of people who did this got burned when the real estate boom turned into a bust.

In addition to the ROI equation you’ll want to consider carefully the tax consequences.  While lease payments are typically 100% tax-deductible, principal payments on a business mortgage are not.  However, operating expenses and depreciation are tax-deductible when you own, and certain municipalities can offer tax breaks and incentives to the purchasers of corporate real estate. Make sure to go over all of the numbers with a finance expert and a tax professional.

If the numbers stack up favorably toward buying you’ll still want to consider a few qualitative factors before taking the plunge.  Buying your own office immediately launches you into a new role with a new set of responsibilities: that of corporate real estate manager.  Make sure that you are comfortable handling things like legal compliance, and health and safety issues that may be outside your area of expertise.

And be sure to consider the likelihood that your business may need to expand, contract, or relocate at some point.  These can all become more difficult when you are the owner of an illiquid asset like an office building.

If you decide to become a buyer you should put together a small team of trusted experts to help you with finding and purchasing the right property for your business.  That team should include an accountant, an attorney, a commercial real estate broker and a lender or mortgage broker.

When looking for the “right” property it pays to heed an old maxim: location, location, location. While you’ll want to consider a variety of factors such as physical condition, allowable use, availability of parking, and potential for expansion or subleasing, location is still the most important issue. The type of business you own will of course help determine the ideal location of your office.  Is it most important for you to be located in an area with high pedestrian traffic, one with easy access to highway, rail, and shipping lanes or one that is convenient to access for a pool of highly skilled workers?

Once you have found your ideal property it is time to lean on your team of experts.  Your commercial broker should help you come up with a sensible offer, while your attorney and accountant can make sure that all of your funding and documentation is in order so that you can get the best available interest rate that your lender has to offer.

By conducting your due diligence to determine if buying is right for your company, and then working with your trusted advisors you should wind up with a building that suits your needs and finances both now and for the foreseeable future.

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