Lease or Buy?
Moving or expanding your business prompts a critical choice

Whether you’re in dog grooming or digital engineering, the physical location of your business is undeniably important. If you’re planning on moving your operations or expanding them into a new facility anytime soon, the choice between leasing and buying will inevitably come into play.

It’s still common for companies to lease from a property developer or landlord, as this arrangement allows you to use your cash to grow your business rather than sink it into a potentially costly building. But you shouldn’t dismiss ownership, either — it offers advantages business owners often overlook.

Leasing lowers risk …

Many companies opt to lease their operational space because doing so lessens the unavoidable risks of inhabiting any location. Businesses tend to expand and contract, which can quickly render some facilities obsolete. If your company fluctuates dramatically and lacks predictable cash flow, consider these uncertainties before signing a 20-year mortgage.

If your business is enjoying rapid growth, that’s great news. But you may find it difficult to plan for the square footage to accommodate this prosperity. Indeed, flexibility should be a key element of your business plan, and not being locked into a building or property will allow your company to relocate as often as needed.

There’s also the financial risk of a prospective purchase. The temptation to invest in an equity asset is understandable, but you’ll likely need at least a 20% down payment to buy or build. Could you put that cash to better use elsewhere? Perhaps buying new equipment, developing new products or hiring a talented executive ranks higher on your priority list. Leasing saves that capital outlay for business essentials.

… and offers more options

“Location, location, location” goes the real estate cliché. And leasing has the advantage here, too. Can you find a building or site that has the exposure you need — an especially crucial desire for retailers? On the other hand, foot traffic may matter a lot less than highway or rail access, or even public transportation, for your employees. There are usually more choices, on both fronts, in the leasing market.

When you decide to move should factor into your thinking as well. Some real estate markets currently favor the tenant over the landlord, though no one can accurately say for how long.

Thus, you may feel pressure to move while you still have the upper hand. Class A office space with luxury amenities often can be found in large urban areas at prices formerly paid for lesser quality space — with landlords offering sizable rent concessions.

In fact, as of this writing, it’s not uncommon to snag anywhere from three to six months of free rent with a lease commitment.

Yet buying boasts its advantages …

So why buy work space at all? Prestige is certainly a factor. Owning a building projects stability and success to peers, clients and vendors.

Meanwhile, there are tax benefits, including deductions for:

• Mortgage interest,
• Property taxes,
• Depreciation, and
• Other related items.

Although owning a building rather than leasing one doesn’t necessarily provide any more tax advantages, the out-of-pocket annual cost of owning is generally less than that of leasing, even when you take into account the lost opportunity cost of the down payment.

Perhaps the greatest upsides to owning are the equity you’ll build up by paying the mortgage principal and the potential increase in the property’s market value. Increasing your business’s net worth in this manner offers better loan opportunities and more financial stability.

And if you need to grow by moving to a larger building, you can sell or lease the space to another company. Either way, the facility serves as an investment.

… and offers profit opportunities

Many business owners staking a real estate claim simply buy an existing building or some space inside it. In fact, purchasing an office condominium unit has become more popular and should be considered.

Then again, you may still want to undertake new construction. It’s an especially fitting choice for certain types of organizations (architecture firms, for instance) or if you have a blueprint-like conception about where your office should be and what it should look like.

If that’s the case, then constructing a new building offers more control over the outcome, though it’s usually more expensive. Architect fees, permits, surveys and modification costs are just a few of the additional expenditures that can quickly add up.

There’s also something about building from scratch that ignites a desire for wide-open spaces — often resulting in an office that could accommodate the cast of Gladiator. But even if you overestimate your square-footage needs, there’s an upside: You can always lease the extra elbowroom to another business, which will help you defray your costs.

It’s a matter of choice

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