Many companies start out leasing the space they need for their business, but at some point it’s prudent to consider moving from rented office space to a property owned by the company. There are numerous advantages to leasing and to property ownership. Leasing is usually less expensive, but owning an office can add a valuable asset to the company.*
How do you decide whether to lease or buy? Your present circumstances and a careful analysis of future growth prospects are important, but so are other pros and cons. Start-ups and new businesses usually lack the resources to purchase office space. Even if these fledgling companies do have the financial resources to buy an office, that money can often be put to more productive use in helping to grow the company.
Here some basic pros and cons to consider when deciding whether to own or lease your company workplace:
Cash is King
This old adage is especially true for new ventures, where outgo often exceeds income. A new company may pay $2,000 a month to rent its office space. However, to buy that same office space might require a down payment of $150,000 or more. Most new companies don’t have an extra $150,000 to invest. Loans to purchase a space may also be harder to come by for companies that don’t have a history of responsible credit use. In these cases, the business may have to lease.
Buying commercial real estate may also include other expenses: an appraisal fee, loan origination fees, a commission to a business agent, licensing fees and other expenses that aren’t incurred with leased workspace.
More mature businesses, with established, reliable customer bases, may have easier access to commercial mortgage funds, and are often better positioned to invest in the business through the purchase of commercial real estate.
Getting Too Big
While getting too big is a nice problem to have, it can indeed be a problem if you own your space rather than leasing. If you buy a workspace based on conservative growth projections – always a good business practice – you may find that in five years your facility is bursting at the seams and you need a bigger place.
There are ways to turn this problem to your advantage. Some companies purchase bigger workspaces and lease out the old building to develop a new revenue stream – rental income.
If you are leasing and you need more space, often you can simply lease more space in the building you currently occupy, eliminating the headache of moving and interrupting business services during that move. Leasing often delivers more flexibility than ownership, but, again, ownership creates a company asset that’s tangible and can be used as collateral for a loan, a company credit line, or the purchase of a second or third office in another location.
When you own the office space in which your company operates, your business can appreciate in value two ways – through the growth of your business activity (more clients, new customers, an expanded roster of products) and through the appreciation in the value of the building the company owns.
The downside? You’re now in two distinct businesses – your actual business and commercial real estate investing. There are costs to real estate ownership. These costs can be maintenance and upkeep, local property taxes, state taxes, increased accounting costs, and other costs related to property ownership.
When you lease, these expenses are built into your monthly rental payment, and the headaches of property ownership fall on the property owner, not on you. This enables you to focus more closely on your actual business.
Lease payments are top-line deductions in the year payments are made. This expense is typically deducted from your business’ bottom line, thereby reducing your taxable basis.
If you own your company property, you may be able to write off maintenance and repair expenses in the year these expenses occur, but depreciation to improvements made to your company property are deducted over a period of many years. When you do the math, the depreciation deduction you receive each year may be much less than the tax advantage of writing off monthly lease payments.
Talk to a tax attorney to determine the tax ramifications of leasing or owning company property. Then weigh the advice you receive from this professional against other factors like the ability to borrow expansion capital using the company real estate as collateral to lower borrowing costs.
The Intangibles of Leasing and Owning
Leasing may appeal to smaller businesses that can’t project growth with any certainty. Leasing also appeals to business owners who want to focus on growing their businesses rather than worrying about a leaky roof – let the building owner call for repairs. Some business owners simply don’t want the responsibilities that come with commercial property ownership. They have businesses to run.
On the other hand, businesses that own their workspace may be considered more substantial by the public and by financial institutions. They have a physical asset in which work activity takes place. This asset can add value to the company when the company is put up for sale. It can be used to back loans for further expansion. It can be divided to suit the needs of the business as it evolves and grows without obtaining permission from a landlord.
Each business has different priorities, different outlooks for the future, different needs and objectives. To buy or lease workspace has pros and cons. There is no one-size-fits-all answer. Talk to the professionals in your business sphere and take your time before deciding which option is best for your company.
It’s also prudent to discuss your plans with your business banker, who can show you the financial options available to you, and help you estimate the short- and long-term effect of your decision on your company’s cash flow.
*A loan from the Small Business Administration can help you purchase a commercial space. Click here for information about SBA loans from Nevada State Bank. (Loans subject to credit approval. Terms, conditions and restrictions may apply.)
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.