Many clients pose these questions to their real estate broker, particularly in times when lease rates are at historic highs or when property rates begin to drop. Should I lease or buy my commercial office space? Does it make sense for my business to do so? What considerations should I make when deciding? Since both scenarios impact your bottom line it’s important to evaluate your current and future business goals and space needs and consider the pros and cons of buying or leasing.
Purchasing Commercial Office Space
Potential Advantages
- When the business owner purchases office space, he knows exactly what his commercial mortgage is, thus defining a fixed cost.
- There are certain tax advantages in owning and operating a commercial space, such as deductions for mortgage interest, property taxes, and real estate depreciation.
- The owner may also be able to subdivide his extra office space to tenants providing an added income stream.
- The owner occupier can operate the building as they see fit thus having more control.
- Finally, there is the possibility that the value of the office space or building will appreciate over time, thereby becoming an investment that will fetch many times the original purchase price.
Potential Disadvantages
- Unforeseen space needs in the future may render the owned office space insufficient and will limit the potential for the company to be nimble enough to move quickly if needed.
- The upfront costs of purchasing commercial space such as the down payment (20-30% typically required), appraisal, and possible expense of property improvement may tie up working capital which could be better utilized in growing the business.
- Real estate depreciation benefits can be nominal since commercial buildings are depreciated for tax purposes over 31.5 years. (land is not depreciated)
- Tax benefits are great however you are basically deferring taxes. After holding commercial real estate for a period and then selling it is subject to gains from the recapturing of the depreciation that has accumulated.
- Managing a commercial property absorbs a lot of time and money and could potentially cause you to lose focus on your company’s primary business.
- Risks with market fluctuations, unforeseen capital expenses, etc.
Leasing Commercial Office Space
Potential Advantages
- Leasing commercial space can conserve corporate equity that can be applied to growth.
- Reduces corporate risk & Increases corporate cash flows.
- If needed it enables the company to have more flexibility to quickly move to satisfy its business needs.
- In some cases can allow the company to be located in an area that they could not afford had they tried to purchase a property.
- Don’t have to worry about building maintenance and capital expenses.
Potential Disadvantages
- Uncertainty of variable costs like lease renewal rent increases, etc.
- The owner may want to sell or redevelop the leased space once the contract has expired.
- No accrual of equity; lease money will go into the pockets of others.
- The property is typically dependent on third-party management services. This can lead to quality of life and service issues since the management service is beholden to the owner and not the tenant.
It’s clear that there are a lot of considerations that a business owner should make and it’s important to carefully consider all available options before making the decision to lease or purchase. The determination will be made by a number of factors including but not limited to financial, tax, business growth needs, location inducements, type of business, and other factors. A reputable commercial real estate agent can advise the business owner mulling over this most important decision and help ensure that the best possible business decision is made.
