Commercial Real Estate: Lease vs. Purchase
With rents going up and interest rates continuing to post rates at or near historic lows, the balance might seem to have shifted to the latter option in the lease vs. purchase decision. However, leasing remains a strong option for many companies. Here are a few points you need to know to understand which one is best for you.
Reasons to Purchase
The purchase side of the lease vs. purchase equation usually comes into play when your company's needs are fixed and predictable for the long term. If you know what you need now and won't change for at least a decade or two, purchasing can be a good option. It gives you total control over your space and a great deal of certainty over what you can do with it since, after all, you own the space.
Purchasing also gives you a chance to participate in the potential appreciation of the property. Unfortunately, for many businesses and most locations, the downsides of purchasing and tying up capital are more than the benefits of the appreciation. However, if your business is one where the appreciated property can form an exit strategy or are in a position to control precious property, purchasing may be a wiser option.
The Benefits of Leasing
Many of American's most successful companies come down on the leasing side of the purchase vs. lease decision for many reasons. First, leasing is typically more flexible, less capital intensive, and offers more options.
The flexibility benefits of leasing are straightforward. While it's technically accurate that buildings can be sold on the market, the usual case is that finding a buyer for a vacant building can take months or years, especially at a reasonable price. With a lease, though, you can move out whenever your lease expires. If a building needs work, you can leave that work for the landlord as well. If you have your lease written with extension options, you can choose to renew it, taking flexibility away from your landlord automatically.
In summary, leasing helps to conserve capital in three ways:
- Moving into a leased property usually requires a lower initial investment than purchasing a building, simply because rent and security deposits are usually less than loan costs and down payments.
- Lease payments may be cheaper than mortgage payments.
- While the accounting of leases is shifting, leases are still treated differently than building purchases when it comes to principles of building your business's balance sheet.
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Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
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