Lease Or buy Commercial Real Estate to function Your Business – 4 Questions to Ask Yourself
1. Is a down payment the best use for my cash?
2. Do I expect my need for space will expand or contract in the next five years?
3. How many years do I expect to function the business?
4. Have I compared the tax advantages/disadvantages of lease payments vs. mortgage payments?
There are many factors to consider when deciding whether you should lease or buy a building to function your business. Answers to the questions above will help you determine the best approach for your individual situation. A financial examination comparing both scenarios will flush out the true differences and discarded light on any hidden costs. It will allow you to compare true annual occupancy costs. Market conditions, dictated by supply and need, have a emotional effect on pricing for both rental rates and buy prices. An important point to consider is whether the appreciation on the building will outpace any interest earned if you were to invest the down payment in a different means over the holding period. Starting with the end in mind and planning your exit strategy is meaningful to accomplishing your goals.
The lists below compare additional costs and factors to consider.
- Security place 1-3 months. Depends on credit strength of business. Letter of Credit. Stability of Landlord.
- Costs of improvements over and above Landlord’s contribution (may come out of your pocket on lease commencement or amortized into annual rent).
- Annual increases in building operating expense and taxes over a base year. These continue to accrue and can be an additional 25% or more of your original base rent on a long term lease.
- Increases in rent when exercising renewal options cause uncertainty in overhead costs for long term projection.
- After hours HVAC charges can range dramatically between Landlords and similarities.
- Leasing allows flexibility if business grows or downsizes.
- Speak with your financial consultant to weigh the benefits of leasing vs. purchasing.
- Down payment +/- 30% of buy price. Opportunity cost of down payment – is there a better use for cash that would a provide better return.
- Possible cost necessary to enhance building. Expense to build out space, upgrade electric, landscaping, parking lot, etc.
- current operating expenses. without of experience in operating a building may increase operating expenses, costs and overhead.
- Capital expenditures for repairs and maintenance of character.
- Additional time must be allocated for management of character and repairs.
- without of flexibility may cause inefficient expansion solutions.
- Speak with your financial consultant to weigh the benefits of purchasing vs. leasing.