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December 28, 2017

Commercial Lease vs Purchase Evaluation

I am often asked, “When is the right time to purchase commercial space for my company?” While I wish there was one answer that fits every business, the responses are as diverse as the company owners asking the question. Here is a guide for walking through the decision-making process and a few considerations to include in your evaluation.

Decision-Making Guide

Make a list with pros and cons. I am huge believer in putting on paper your thoughts in order to help make a decision. Each business is so different and with that, comes very unique prospects and challenges. These will impact your decision to lease or purchase. Put down everything that makes your business run, and how those will either be made easier or harder depending on leasing or purchasing.

Talk to a Commercial Agent about potential opportunities. There are many real estate agents out there but I cannot stress the importance of finding one that specializes in commercial real estate. It really is a different world. Most commercial agents will be happy to consult with you and help navigate what is available for lease and for purchase. Keep in mind that if you are looking for a specific area, your decision may be made for you due to availability. Commercial space is at a premium these days and can be difficult to land the exact space you want for lease or purchase. Knowing first may save you some time and worry.

Talk to your banker. If you don’t have a good relationship with your banker, you are missing out. I consider mine a family member. Your banker should be your go-to for all things growth and expansion. They can assist with crunching numbers, knowing where you stand financially, what capital you actually have to work with and advise you on the whole process. Utilize their experience and expertise to assist you as much as possible.

Evaluation Considerations – Leasing versus Purchasing

Leasing pros include not having to come up with a large down payment leaving you with more working capital to put back in your business, the tax benefit of deducting lease payments, repairs and maintenance are handled by the landlord, location can be better for less money, and flexibility to move to another location at the end of the lease instead of having to sell your location when you grow out of it. There are more pros but this should get your list started.

Buying pros include building equity and having set costs (a lease will likely increase year over year), depreciation on taxes, deduction of interest payments on your taxes, costs less over long-term (15 year evaluation versus leasing with yearly increases), additional income opportunity by buying larger space and leasing part of it out, and retirement benefits. As with home ownership, this is a big decision with a lot of variables.

 

As you can see, these are just a few of the things to consider when deciding whether to lease or purchase. Talk to friends, family, other business owners, and the professionals listed above to assist in your decision making. Above all, you have to feel good about whatever decision you make; don’t rush, be thorough, and have a detailed plan when and if you decide to move forward with either option.

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