Commercial Office Space: Lease vs. Buy? Ownership Pluses and Minuses – Part I
Contributed by Barbara Hunter, Sr. Vice President, Regents Bank, Carlsbad, CA
The decision to own versus lease your office space can have a significant impact on your business. For many businesses, there are many choices and not all are clear. In this two part series we’ll examine the pros and cons of each option. We recommend that you consult with an experienced Regents Bank professional to assist you with this important decision.
The Pluses and Minuses of Ownership
There are numerous advantages to ownership. With free-standing buildings, ownership gives you the control to operate and improve the building as you see fit. Being able to change the appearance of the property and place visible signage can be one of the best marketing tools for your business.
The financial benefits of owning include tax savings, potential appreciation and additional rental income. The tax savings come from depreciation allowances and mortgage interest paid during the holding period. Appreciation comes from capital gains proceeds at the time of sale.
Over most ten-year holding periods, real estate has historically appreciated in value. However, as we have seen in the past decade, there can be significant peaks and valleys in the real estate cycle making a real estate investment a concern. Many owners have fared well and have built great equity. There are others that lost the equity, but many purchased properties that were too large for their business or cost too much per square foot. Making sure a potential buyer discusses the pros and cons of the purchase with their banker and CPA many times will make a big difference in the cost of the property.
If a portion of the property is rented, income from tenants can be used to pay part of the mortgage, fund the business or capitalize other needs as you see fit. Another idea to consider once the owner is ready to “exit” the business through a sale, they may still want to maintain the real estate as an income producing retirement investment . Depending on the direction of the company after the sale, the real estate owner may have a guaranteed tenant that they know well (i.e. their previous company’s new ownership).
There are also disadvantages to ownership and these should be weighed before making a decision to purchase rather than lease. The initial cash down payment to acquire a property is cash that could otherwise be used to fund the growth of the business.
Financing commercial real estate requires strong financial statements for the business and often requires the personal guarantee of one or more of the partners. Also, the addition of long-term debt on the balance sheet can make it difficult for some businesses to qualify for additional financing down the road. One way to counteract that is to take title in a real estate holding company and lease the property back to the business.
Every business’ situation is unique. Part II of our series will examine the advantages and disadvantages in leasing a commercial property.
Call Barbara today and she’ll assist you in assessing what’s right for your business and will design a strategy for you that will be a long term solution, not just a quick fix.
Senior Vice President Regents Bank
1921 Palomar Oaks Way, Suite 100 Carlsbad, CA 92008
Telephone: (760) 931-5140
Posted on October 5, 2011, in Business Advice and tagged Barbara Hunter, commecial office space owning vs leasing, commercial office space for sale, Regents Bank. Bookmark the permalink. Leave a comment.