Throughout my many years as a commercial real estate agent, I’ve had countless clients ask me, “Should I lease or buy?” Of course, the answer to that depends entirely on who’s asking, but the analysis required to answer the question is remarkably similar to that required for leasing or buying a car, or renting or buying a house. In either case, the final decision really depends on that business’ particular situation and long-term growth prospects.
The Case for Leasing
There are many benefits to leasing a space versus buying, and vice versa. The question is: which benefits are most important to your particular business?
Take Retail Ready Foods.
Having leased a 2,500 sq.ft. space for 10 years, the president of Retail Ready Foods, John Ferarro, considered purchasing a commercial property.
While viewing potential properties, John kept several factors in mind: the amount it would cost to make improvements to the building to satisfy Retail Ready’s needs, the cost of the building itself, and the cost of financing. John was also concerned about the inflexibility of owning property should Retail Ready’s business grow or contract.
After careful analysis, John determined that he would receive a far better return on equity by investing his cash back into his business and continuing to lease commercial space.
The Case for Buying
One option available to clients who purchase commercial space is to purchase more space than they need and rent out the excess; effectively becoming landlords themselves. While this strategy has the obvious benefit of generating rental income, when most clients seriously consider whether or not they want to become a landlord, most quickly conclude they do not.
Another consideration in the lease vs. buy debate are tenant improvement and moving costs. When leasing, these costs can be covered by the landlord through a tenant improvement allowance. However, if you decide to purchase your premises, you’ll have to cover these costs yourself. However, if your business involves significant investments in equipment or machinery or has a ‘dirty’ use, owning your building relieves you of the concerns that your landlord may impose certain restrictions and restoration clauses in your lease.
Let’s take a look a space planning consultancy Metford Design and their decision to purchase.
For 10 years, Aggie Metford had leased office space in the Toronto airport area for her business, Metford Design Consultants. With business growing at a rapid pace, Aggie was concerned that the current space could afford her the room needed to accommodate growth. It was also a 40-minute commute from her home.
Aggie carefully considered the equity required, the cost of the building, current interest rates, future growth prospects for Metford Design, and of course, the time she would save with a shortened commute. She concluded that not only would the building carry for less than leasing, but also the equity required would not hurt her business and the investment in real estate would provide a better return than other investment options available to her.
After 10 years, Metford Design is still operating out of that building. If you’d like to speak to Aggie about her experience, feel free to email her.
The decision of whether to lease or buy comes down entirely to your particular situation including business needs, other available investment vehicles, and future prospects. If you feel that owning commercial property would be beneficial for your business, sit down with a qualified professional to review your options.