Weighing the Benefits of Leasing Versus Buying Commercial Real Estate

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  • By Western Alliance
  • Feb 22, 2017
Multiple work stations in an open work area Most businesses, even online tech-centered companies, need some sort of physical area in which to operate. This essential requirement for space means company owners will need to decide whether to lease or buy commercial real estate. 

Like most major decisions a business owner has to make, both leasing and buying have an abundance of positives. So many attractive qualities on either side can make it challenging to determine what's best for your business. Consider the pros both sides have to offer:

Top 3 Pros of Leasing

Leasing commercial real estate offers many benefits for companies, including:

No down payment: This can be one of the biggest pros for leasing commercial property, especially for businesses seeking ways to be more resourceful with their working capital. Collecting the money for a down payment can be a major obstacle for cash-strapped or illiquid companies – or for businesses with other, more pressing uses for their resources.

Repairs handled by Landlord: If your property is leased, when something breaks, malfunctions or needs a repair, it's the landlord's or property manager’s responsibility to fix the problem. This alleviates the need for your business to maintain an active maintenance crew to deal with burnt-out lightbulbs, AC issues, broken windows or faulty locks.

Short-term options available: If a business has its sights set on rapid scaling, the size of your commercial space could quickly become too small to accommodate your growing operation. Thankfully, leased property comes with short-term options. Shorter lease terms won't leave a company locked into a space that its operations could outgrow.

Top 3 Pros of Buying

On the other hand, there are plenty of positive aspects that stem from buying commercial property, such as:

Property is an investment: Many businesses are on the lookout for a ways to invest excess liquidity while increasing their assets - real estate is an appreciating asset class. While of course this isn’t always the case, real estate values tend to appreciate over time, making property a generally sound investment for your business over the long term. Location and quality of the asset are very important factors when considering a purchase as these characteristics impact asset valuation.   

Buying saves you money: Rent prices have a tendency to increase over time and it's rare to encounter declining rent costs. Although buying commercial space requires a down payment, ownership of the property can give you the opportunity to finance the property with long-term fixed rate loans eliminating variable costs like a lease rate. Further, the amortization eventually allows the business to pay off the note and own the asset free and clear, further enhancing the company’s balance sheet. The longer you plan on staying in one place, the greater the chances for savings over the long run. Even if you’re not sure you have enough capital for a down payment, exploring a conventional commercial real estate loan or an SBA loan could be worthwhile.

Removes a landlord: Bad Landlords and property managers can sometimes be a greater hindrance than they are a benefit. These individuals or companies can interfere with remodeling plans or be slow to make repairs. Owning your own commercial real estate eliminates this intermediary and allows you the freedom to do what you want with your property. Whether it's painting the walls to match your branding efforts or expanding the space, not having a landlord can give your company greater flexibility.

Questions to ask before you decide:

  • Does your company have the working capital to cover the initial down payment?
  • Will your company outgrow your current space in the next few years?
  • Can this equity be better invested in other areas that benefit your business?
  • Does your company require specialized or hard-to-move equipment, machinery or fixtures?
  • Will a commercial real estate loan help your company realize its potential?

Making the right choice

While there are plenty of pros on both sides of the leasing versus buying commercial space debate, your company's unique situation should play a key role in the final decision. From your current cash flow to both your short- and long-term goals, it's important to consider all key factors before coming to a conclusion.

Talk with an experienced commercial real estate lender to help sort through your options.  It’s important to look for the best bank for commercial loans in your region to help guide your decision-making. Learn more about Western Alliance’s expert commercial real estate resources and full range of business banking services.

Sources:
"Is It Financially Better to Buy or Lease Your Office Space?" QuickBooks. Intuit, 21 Dec. 2016. Web. 21 Feb. 2017.