Here is a list of factors to consider when evaluating the purchase of a commercial property, particularly an office or building, vs. leasing or continuing to lease.
FACTORS TO CONSIDER IN MAKING COMMERCIAL PROPERTY PURCHASE DECISION
Location/Site Considerations
- Is it in a thriving neighborhood?
- Is it in a commercial district that's popular and full of tenants, or half empty?
- Are prices trending up or down?
- Has the building been well-maintained?
- What business image equity does the building offer?
- How long you plan to stay in the space; will it be long enough for the property to appreciate in value? If not, could you easily rent it out to a tenant if you move?
Property Management
- Will you hire out property management or do it yourself?
Opportunity Cost
- What is opportunity cost of money used as deposit to purchase a building?
- What return would you expect to receive on that money compared to the return you would expect to receive if you invested the money back into your business or other investments?
BUY Vs LEASE CONSIDERATIONS
- Cash Outlay - Down payment of approximately 25% of the purchase price, depending on the lender and buyer’s credit, vs. lease space with good credit, typical outlay is the security deposit and first month’s rent
- Fixed vs. Variable Cost – With purchasing, costs more stable over long run, especially with long-term, fixed-rate mortgage. With leasing, the market dictates rent costs over the long term.
- Growth Considerations – Leasing allows more flexibility and fewer growth constraints for newer companies or those in high growth mode. If company is mature and stable, or buys bigger building and rents out additional space, buying can not only meet future space needs, but offers another source of income.
- Appreciation – In purchase, generate long-term increase in value through market appreciation.
- Tax Factors - Lease payments are usually fully deductible, but many expenses of owning office space must be written off over longer periods of time of up to 39 years. Depreciation on the improvement portion of the property and can usually deduct all interest payments. When considering the tax factors it is essential to consult an attorney and tax professional about the legal and financial considerations of owning office space.
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Great post Peggy. I'm working through my class materials for tomorrow's SigmaFree class and building business value is one of the "pillars" of a business strategy. Any thoughts on how the buy v. lease decision affect business value?
ReplyDeleteWhen I meet with new clients, we always discuss the business image equity they are looking for in the space they wish to locate in. It can show financial strength when a business tells its clients they own their space. But growth considerations are most important in a buy vs. lease decision, so a newer business might evaluate more closely their business strategy in terms of space needs than a more established one. Hope that helps as a short answer.
ReplyDeleteI've just opened a new business, and I'm thinking of getting an office space somewhere near home. I live somewhere near Reston and Dulles. My friend recommended me to look for an office space in Reston, VA. He told me that the office spaces there are good. Another suggestion he made was to look for an office space in office space in Dulles, VA near the airport. Both office spaces are convenient for me, but of course, I have to consult my colleagues first before I make this move. Thanks for sharing tips on whether to buy or lease an office space!
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