The decision to buy or lease is one of the most critical any business must make, and depends on a variety of factors.
Like a family purchasing a home, buying commercial space is one of the biggest economic commitments a company makes, and should be done in partnership with your local bank and real estate expert.
Commercial real estate experts generally agree that companies planning to stay in one location for the long term – say seven years or more – obtain clear advantages from purchasing their property, as compared to leasing: You can save money and gain control over your company’s future.
In addition, owning your own commercial space,
- Gives you control over your company’s vital workplace and allows you to creatively shape it to reflect your company’s culture. Once you own your property, you can do what you want with it.
- Your company brand can be displayed prominently – and exclusively – on your property.
- Protects you from higher rental fees. Leasing may offer a sweet deal under your current contract, but a landlord can always raise the rent when the agreement expires.
- You are investing in your own business and acquiring equity in an asset likely to appreciate significantly over time.
- The cost of not buying your property can be substantial. One expert, David Waring of FitSmallBusiness.com, compared the estimated costs of buying and leasing and concluded that for firms planning to stay at the same location for seven years or more, “buying is generally much less expensive than leasing.”
- In a specific example (3,228 square feet leased at $8 per sq. ft. with a sales price of about $257,000), Waring calculated that a business leasing the building for 15 years would pay over $322,000 more than a buyer, given certain assumptions about interest rates, leasing costs and other factors. The website shows the calculations used to arrive at this figure.
Potential buyers need good financial advice
Buying is a complex process, and business owners must answer critical questions.
Here are some key questions to ask:
- What is the outlook for commercial mortgage rates in your community? Is this a good time to buy?
- Do you qualify for a loan? At what rate?
- Are your company’s cash flow and reserves strong enough to handle a significant down payment, as well as other additional costs that accompany a purchase? These include assessing current property value; securing a broker, attorneys and an accountant; carrying out a thorough property inspection; title search, etc. And of course moving and furnishing your new office.
- What are the tax advantages available to you as a commercial property owner in terms of tax deductible mortgage interest, depreciation and other factors?
- Should you acquire space large enough to accommodate rentals?
- Do the benefits outweigh the risks?
There is no simple answer for the businesses thinking of buying commercial property. Business owners need to learn about the risks and opportunities of ownership. That means doing a lot of homework on the commercial real estate market in your area, while simultaneously running your normal business operations.
Unless you are already in the commercial real estate business, it is essential to obtain expert advice and guidance from professionals. Your local bank is the best place to start.
Community banks have unmatched experience in your local real estate market as well as expertise in commercial mortgages, interest rate risk, tax benefits, local trends in commercial property sales and valuation, plus other important factors.
Local banks can offer you the advice and the financial options you need to make a smart decision.
Ownership is, after all, an investment in your future and that of your company.
Sources: Interviews with real estate agents, Coy Davidson in The Tenant Advisor blog, OfficeSpace.com, Business Daily News, Inc.com, CRE Online, Inc., FitSmallBusiness.com