August 12, 2015
By John Hardin
When looking at commercial real estate, the almost never-failing question for a business owner revolves around whether to lease or buy property to fulfill office space needs. While the answer is different for each individual company, there are a few things to keep in mind when considering these two options.
How much has your company grown over the last five years? Do you expect the same rate of growth?
Paying close attention to your business goals and your company’s past growth can play an important part in knowing when it’s time to take the next step for your office space and whether to purchase or lease a property. If your employee count has changed dramatically in the past five years, perhaps leasing space will be best for your business. If you have experienced unprecedented growth year-over-year, leasing space that allows for additional expansion may be the best option. If your core number of employees has remained relatively unchanged in the past five years and you don’t expect much space expansion requirements, it may be a smart decision for your company to begin researching the benefits of purchasing a building.
Are you at the point in your business cycle to be able to use some of your money for a down payment and other building-related expenses?
Often, purchasing an office building will require more money up front than leasing a property. In addition to a required down payment, purchasing a building will require appraisals, inspections, loan fees and myriad other upfront expenses. As time goes on there will be other expenses to building ownership that you need to be prepared for, such as replacing the building’s roof, HVAC system, etc. If your money is tight, and you are concerned about cash flow issues in the near term and future, then purchasing a building may not be right for your business.
Is it a priority for you to have control over occupancy costs?
When you lease a building in the market, you are subject to increases in occupancy costs beyond your control. Typically, landlords will always want to increase the rent of their properties over time, especially in a growing market. As a tenant, the majority of your occupancy costs are market driven and your control is somewhat limited. When you own your office, you have much more control over your occupancy costs over time. Your rent can be driven by the debt you have on the property, but you can also re-finance that debt to give yourself better terms.
Increasing Your Net Worth
Whose net worth do you want to increase?
Another advantage of owning a building is the equity you will build up over time. Just like owning a home, when you own a building, over time, you will build equity through debt reduction and market appreciation. When you own a building over a 10-15 year period, you will have an asset worth a significant amount to you and your financial statement. If you choose not to purchase a building and instead lease space over that same 10-15 year period, your landlord will have an asset worth significantly more, thanks to you.
Control, Control, Control
Do you want control of your own office space?
When you lease a building, you as the tenant have very little control over the physical nature of the building, the rent paid, the operating expenses and the overall management of the building. The opposite is true when you own your building; you control everything, including the rent you want to charge yourself, the look you want for the building, the debt structure, etc. With this control, comes the responsibility to appropriately manage the property for your team and other tenants.
There are a number of other items to consider before deciding whether your business should buy or lease. It is important for a business to work with a commercial real estate broker and advisor who knows your business goals and can help you achieve these goals through your real estate decisions.