Commercial Office Space: Lease vs. Buy? Leasing Pluses and Minuses – Part II
Contributed by Barbara Hunter, Sr. Vice President, Regents Bank, Carlsbad, CA
As with ownership, leasing your office space can have both positive and negative advantages. With leasing, you have the flexibility to easily relocate your business at the end of the lease term. Perhaps you would prefer to be in a different market or there is a more prestigious and or modern building in a better location. Or you may have simply outgrown your space.
Leasing eliminates many of the risks of building ownership discussed earlier in the article. It also frees you from the burdens of property maintenance and other property management issues which now become the responsibility of the landlord.
Leasing frees up cash that can be used to fund the growth of your business. Typically the only cash outlay required in a new commercial lease is one or two months rent value as a security deposit. By contrast, purchasing your space can require down payments and closing costs, which can total up to thirty percent of the purchase price, less if SBA financing is available.
The main disadvantage of leasing is the lack of equity build-up in your property. As mentioned, real estate has historically appreciated in value over most ten-year holding periods. If the holding period is increased to twenty or thirty years then the appreciation can be even more significant.
When leasing your space, there is less flexibility in the modifications that can be made. Even if those modifications would be paid for entirely by the tenant, the landlord has the right to disapprove them if he/she feels the improvements will make it harder to re-lease the space should you relocate at the end of the term.
Unless you have negotiated renewal rights into the lease agreement, you are not guaranteed the right to remain in the space at the end of the lease term. Perhaps, the adjoining suite is occupied by a tenant that is running out of room and needs to expand into the space. If the tenant currently occupies a significant amount of space in the building or is a key tenant within the building the landlord will have no choice but to decline your request to renew and keep the key tenant instead. However, he/she may offer you the option of relocating to another space within the building if it is available.
The lease vs. buy decision is not an easy one for most businesses, but if you fully understand the advantages and disadvantages to each, then you’ll make the decision that’s right for you.